Should regulators always be transparent? A bank run experiment

Abstract

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.