Mandatory Disclosure and Financial Contagion

50 Pages Posted: 13 Jul 2015 Last revised: 12 Apr 2023

See all articles by Fernando Alvarez

Fernando Alvarez

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Gadi Barlevy

Federal Reserve Bank of Chicago; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: July 2015

Abstract

This paper explores whether mandatory disclosure of bank balance sheet information can improve welfare. In our benchmark model, mandatory disclosure can raise welfare only when markets are frozen, i.e. when investors refuse to fund banks in the absence of balance sheet information. Even then, intervention is only warranted if there is sufficient contagion across banks, in a sense we make precise within our model. In the same benchmark model, if in the absence of balance sheet information investors would fund banks, mandatory disclosure cannot raise welfare and it will be desirable to forbid banks to disclose their financial positions. When we modify the model to allow banks to engage in moral hazard, mandatory disclosure can increase welfare in normal times. But the case for intervention still hinges on there being sufficient contagion. Finally, we argue disclosure represents a substitute to other financial reforms rather than complement them as some have argued.

Suggested Citation

Alvarez, Fernando and Barlevy, Gadi, Mandatory Disclosure and Financial Contagion (July 2015). NBER Working Paper No. w21328, Available at SSRN: https://ssrn.com/abstract=2629934

Fernando Alvarez (Contact Author)

University of Chicago - Department of Economics ( email )

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Gadi Barlevy

Federal Reserve Bank of Chicago ( email )

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National Bureau of Economic Research (NBER)

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