Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96635
Authors: 
Alvarez, Fernando
Barlevy, Gadi
Year of Publication: 
2014
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2014-04
Abstract: 
This paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features contagion, meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, we assume banks can profitably invest funds provided by outsiders, but will divert these funds if their equity is low. Investors thus value knowing which banks were hit by shocks to assess the equity of the banks they invest in. We find that when the extent of contagion is large, it is possible for no information to be disclosed in equilibrium but for mandatory disclosure to increase welfare by allowing investment that would not have occurred otherwise. Absent contagion, mandatory disclosure cannot raise welfare, even if markets are frozen.
Subjects: 
Information
Networks
Contagion
Stress Tests
JEL: 
G01
G14
G17
Document Type: 
Working Paper

Files in This Item:
File
Size
715.48 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.