Precision of Public Information Disclosures, Banks’ Stability and Welfare

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Title: Precision of Public Information Disclosures, Banks’ Stability and Welfare
Author: Moreno, Diego ; Takalo, Tuomas
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 3/2021
Year of publication: 2021
Publication date: 4.3.2021
Pages: 49
Subject (yso): pankit; sääntely; kilpailu (toiminta); riskit; informaatio
Keywords: stressitestit; vakaus
JEL: G21; G28; D83
Other keywords: financial stability; stress tests; bank transparency; banking regulation
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.
Rights: https://helda.helsinki.fi/bof/copyright


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