The Leverage Effect of Bank Disclosures

1 Pages Posted: 8 Oct 2021

See all articles by Philipp Koenig

Philipp Koenig

Deutsche Bundesbank

Christian Laux

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF); European Corporate Governance Institute (ECGI)

David Pothier

University of Vienna - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: 2021

Abstract

The general view underlying bank regulation is that bank disclosures providemarket discipline and reduce banks' risk-taking incentives. We show that bankdisclosures can increase bank leverage and bank risk. The reason stems from theinteraction between insured and uninsured debt. Bank disclosures reduce the agencyproblem between uninsured debt and equity, thereby lowering the cost of leverage forbanks. By issuing uninsured short-term debt that is repaid ahead of insured depositswhen economic conditions deteriorate, banks dilute insured deposits. Higher levelsof uninsured short-term debt increase the subsidy provided by deposit insurance,which increases banks' risk-taking incentives. We identify conditions under whichthis negative leverage effect dominates the standard market discipline effect, so thatproviding market discipline through bank disclosures increases banks' risk.

Keywords: Bank Disclosures, Market Discipline, Bank Leverage

JEL Classification: D80, G21, G14

Suggested Citation

Koenig, Philipp and Laux, Christian and Pothier, David, The Leverage Effect of Bank Disclosures (2021). Deutsche Bundesbank Discussion Paper No. 31/2021, Available at SSRN: https://ssrn.com/abstract=3934775 or http://dx.doi.org/10.2139/ssrn.3934775

Philipp Koenig (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Christian Laux

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

David Pothier

University of Vienna - Department of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

HOME PAGE: http://sites.google.com/site/dgpothier

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