Precision of Public Information Disclosures, Banks’ Stability and Welfare

49 Pages Posted: 8 Mar 2021

See all articles by Tuomas Takalo

Tuomas Takalo

Bank of Finland, Monetary Policy and Research Department; VATT Institute for Economic Research

Diego Moreno

Universidad Carlos III de Madrid - Department of Economics

Date Written: March 4, 2021

Abstract

We study the optimal precision of public information disclosures about banks assets quality. In our model the precision of information affects banks' cost of raising funding and asset profile riskiness. In an imperfectly competitive banking sector, banks'stability and social surplus are non-monotonic functions of precision: an intermediate precision (or low-to-intermediate precision if banks contract their repayment promises on public information) maximizes stability, and also yields the maximum surplus when the social cost of bank failure c is large. When c is small and the banks' asset risk taking is not too sensitive to changes in the precision, the maximum surplus (and maximum risk) are reached at maximal precision. In a perfectly competitive banking sector in which banks' asset risk taking is not too sensitive to the precision of information, the maximum surplus (and maximum risk) are reached at maximal precision, while maximum stability is reached at minimal precision.

JEL Classification: G21, G28, D83

Suggested Citation

Takalo, Tuomas and Moreno Ruiz, Diego, Precision of Public Information Disclosures, Banks’ Stability and Welfare (March 4, 2021). Bank of Finland Research Discussion Paper No. 3/2021, Available at SSRN: https://ssrn.com/abstract=3798237

Tuomas Takalo

Bank of Finland, Monetary Policy and Research Department ( email )

P.O. Box 160
Helsinki, FIN-00101
Finland

HOME PAGE: http://https://sites.google.com/site/tuomastakalo/

VATT Institute for Economic Research

Diego Moreno Ruiz (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
3491 624 9653 (Phone)
3491 624 9875 (Fax)

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