XXVI Edition

14-15-16 December 2017"

Bank Transparency, Threat of Bank Runs, and Bank Risk-Taking

Chen Yehning, National Taiwan University
HASAN IFTEKHAR, Fordham University
Takalo Tuomas Takalo, Bank of Finland and VATT Institute for Economic Research

We study the effects of bank transparency on bank risk-taking incentives, banker moral hazard, vulnerability to bank runs, and ultimately, on banking sector stability and welfare. We show how enhanced bank transparency may increase banks’ vulnerability to runs, but this threat of bank runs incentivizes banks to take less risk. We find that bank stability and welfare are a non-monotonic function of transparency, and that stability and welfare are maximized at an intermediate level of transparency. Our model also suggests that in a financial crisis, the government should enhance transparency if the crisis is very serious.

Area: Financial Regulation and Supervision

Keywords: Basel III, bank transparency, asset risk taking, bank runs, bank failures

Paper file

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