Should regulators always be transparent? a bank run experiment

Surajeet Chakravarty, Lawrence Choo, Miguel A. Fonseca, Todd R. Kaplan

Research output: Contribution to journalArticlepeer-review

Abstract

We study, using laboratory experiments, the extent to which disclosure policies about the financial health of a bank affect the likelihood of a bank run. We consider two disclosure regimes, full disclosure and no disclosure, under two scenarios: one in which the bank is on average financially solvent and another in which the bank is on average insolvent. When the bank is on average insolvent, the full disclosure regime reduces the expected likelihood of runs. In contrast, when the bank is on average solvent, the full disclosure regime increases the expected likelihood of runs. We also find that disclosing identical information when depositors’ expectations are low versus high (good versus bad news) leads to behavioural differences only indirectly through their beliefs about the other depositor's actions. Our findings show that instituting a policy of greater banking transparency is not always beneficial.

Original languageEnglish
Article number103764
JournalEuropean Economic Review
Volume136
DOIs
StatePublished - Jul 2021

Bibliographical note

Funding Information:
? Acknowledgements: We thank Jack Stecher, Thiess Buettner, Xiaoyu Zhou, seminar participants at the University of Erlangen-Nuremberg and conference participants at the Economic Science Association (Berlin) for their comments and insights. This work is supported by the Israel Science Foundation (ISF) grant number 1859/16.

Funding Information:
Acknowledgements: We thank Jack Stecher, Thiess Buettner, Xiaoyu Zhou, seminar participants at the University of Erlangen-Nuremberg and conference participants at the Economic Science Association (Berlin) for their comments and insights. This work is supported by the Israel Science Foundation (ISF) grant number 1859/16.

Publisher Copyright:
© 2021 Elsevier B.V.

Keywords

  • Bank runs
  • Banking crises
  • Information disclosure
  • Public policy

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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