Bank instability: Interbank linkages and the role of disclosure

Christian Koenig-Kersting, Stefan T. Trautmann, Razvan Vlahu*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We study the impact of disclosure about bank fundamentals on depositors' behavior in the presence (and absence) of economic linkages between financial institutions. Using a controlled laboratory environment, we identify under which conditions disclosure is conducive to bank stability. We find that bank deposits are sensitive to perceived bank performance. While banks with strong fundamentals benefit from more precise disclosure, an opposite effect is present for solvent banks with weaker fundamentals. Depositors take information about economic linkages into account and correctly identify when disclosure about one institution conveys meaningful information for others. Our findings suggest potential costs of bank transparency and that disclosure may not always be stability-enhancing.
Original languageEnglish
Article number106353
JournalJournal of Banking & Finance
Volume134
DOIs
Publication statusPublished - Jan 2022

Keywords

  • Disclosure
  • Banks
  • Interbank linkages
  • Coordination
  • Beliefs
  • DEPOSIT INSURANCE
  • MARKET DISCIPLINE
  • UNIQUE EQUILIBRIUM
  • GLOBAL GAMES
  • SOCIAL VALUE
  • INFORMATION
  • RUNS
  • COORDINATION
  • CONTAGION
  • SYSTEM

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