Precision of Public Information Disclosures, Banks’ Stability and Welfare

Abstract

We study the optimal precision of public information disclosures about banks assets quality. In our model the precision of information affects banks' cost of raising funding and asset profile riskiness. In an imperfectly competitive banking sector, banks'stability and social surplus are non-monotonic functions of precision: an intermediate precision (or low-to-intermediate precision if banks contract their repayment promises on public information) maximizes stability, and also yields the maximum surplus when the social cost of bank failure c is large. When c is small and the banks' asset risk taking is not too sensitive to changes in the precision, the maximum surplus (and maximum risk) are reached at maximal precision. In a perfectly competitive banking sector in which banks' asset risk taking is not too sensitive to the precision of information, the maximum surplus (and maximum risk) are reached at maximal precision, while maximum stability is reached at minimal precision.