Banks’ disclosure of information and financial stability regulations

Abstract

This study proposes a model that analyzes the interaction between a bank and its creditors. The bank uses short-term wholesale funding and the creditors decide whether to roll over their loan using information about the bank. The model shows that, when the creditors become more reluctant to roll over their loans since the bank heavily depends on such a debt, the bank does not issue the short-term debt excessively and its privately optimal amount of the debt in this situation corresponds to the socially desirable one. This implies that a regulation requiring banks to disclose information about their capital structures can by itself contribute to stabilizing the financial system. However, the model also shows that to ensure the result, we need an additional regulation that bridges the information gap between banks and creditors.