Transparency in the Financial System: Rollover Risk and Crises

Abstract

We present a theory of optimal transparency when banks are exposed to rollover risk. Disclosing bank‐specific information enhances the stability of the financial system during crises, but has a destabilizing effect in normal economic times. Thus, the regulator optimally increases transparency during crises. Under this policy, however, information disclosure signals a deterioration of economic fundamentals, which gives the regulator ex post incentives to withhold information. This commitment problem precludes a disclosure policy that provides ex ante optimal insurance against aggregate shocks, and can result in excess opacity that increases the likelihood of a systemic crisis.

Reference

Matthieu Bouvard, P Chaigneau, and A de Motta, “Transparency in the Financial System: Rollover Risk and Crises”, The Journal of Finance, vol. 70, n. 4, 2015, pp. 1805–1837.