Public Disclosure and Bank Failures

We study how public disclosure of banks' risk exposure affects banks' risk taking incentives and assess the impact of the presence of informed depositors on the soundness of the banking system. We find that, when banks have complete control over the volatility of their loan portfolio, public disclosure reduces the probability of banking crises. However, when banks do not control their risk esposure, the presence of informed depositors may increase the probability of bank failures.