The Transparency of the Banking Industry and the Efficiency of Information-Based Bank Runs

44 Pages Posted: 22 Feb 2005

See all articles by Yehning Chen

Yehning Chen

National Taiwan University

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Date Written: October 31, 2005

Abstract

In this paper, we investigate the relationship between the transparency of banks and the fragility of the banking system. We show that information-based bank runs may be inefficient because the deposit contract designed to provide liquidity induces depositors to have excessive incentives to withdraw. An improvement in transparency of a bank may reduce depositor welfare through increasing the chance of an inefficient contagious bank run on other banks. A deposit insurance system in which some depositors are fully insured and the others are partially insured can ameliorate this inefficiency. Under such a system, bank runs can serve as an efficient mechanism for disciplining banks. We also consider bank managers' control over the timing of information disclosure, and find that bank managers may lack the incentive to reveal the information about their banks.

Keywords: bank run, contagion, transparency, market discipline, deposit insurance

JEL Classification: G21, G28

Suggested Citation

Chen, Yehning and Hasan, Iftekhar, The Transparency of the Banking Industry and the Efficiency of Information-Based Bank Runs (October 31, 2005). Bank of Finland Research Discussion Paper No. 24/2005. Available at SSRN: https://ssrn.com/abstract=670504 or http://dx.doi.org/10.2139/ssrn.670504

Yehning Chen (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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