Bank Instability: Interbank Linkages and the Role of Disclosure

48 Pages Posted: 14 Jan 2021

See all articles by Christian König-Kersting

Christian König-Kersting

University of Innsbruck

Stefan T. Trautmann

Heidelberg University - Alfred Weber Institute for Economics

Razvan Vlahu

De Nederlandsche Bank

Date Written: July 14, 2020

Abstract

We study the impact of disclosure about bank fundamentals on depositors’ behavior in the presence (and absence) of economic linkages between financial institutions. Using a controlled laboratory environment, we identify under which conditions disclosure is conducive to bank stability. We find that bank deposits are sensitive to perceived bank performance. While banks with strong fundamentals benefit from more precise disclosure, an opposing effect is present for solvent banks with weaker fundamentals. Depositors take information about economic linkages into account and correctly identify when disclosure about one institution conveys meaningful information for others. Our findings highlight both the costs and benefits of bank transparency and suggest that disclosure is not always stability enhancing.

JEL Classification: D81, G21, G28

Suggested Citation

König-Kersting, Christian and Trautmann, Stefan T. and Vlahu, Razvan, Bank Instability: Interbank Linkages and the Role of Disclosure (July 14, 2020). Bank of Finland Research Discussion Paper No. 14/2020, Available at SSRN: https://ssrn.com/abstract=3764719

Christian König-Kersting (Contact Author)

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Stefan T. Trautmann

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Razvan Vlahu

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands
+31205242483 (Phone)
+31205242506 (Fax)

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