We study, using laboratory experiments, the extent to which disclosure policies
about the financial health of a bank affect the likelihood of a bank run. We consider two disclosure regimes, full disclosure and no disclosure, under two scenarios: one in which the bank is on average financially solvent and another in
which the bank is ...
We study, using laboratory experiments, the extent to which disclosure policies
about the financial health of a bank affect the likelihood of a bank run. We consider two disclosure regimes, full disclosure and no disclosure, under two scenarios: one in which the bank is on average financially solvent and another in
which the bank is on average insolvent. When the bank is on average insolvent,
the full disclosure regime reduces the expected likelihood of runs. In contrast,
when the bank is on average solvent, the full disclosure regime increases the
expected likelihood of runs. We also find that disclosing identical information
when depositors’ expectations are low versus high (good versus bad news) leads
to behavioural differences only indirectly through their beliefs about the other
depositor’s actions. Our findings show that instituting a policy of greater banking transparency is not always beneficial.