Transparency, Liberalization, and Banking Crisis
The authors investigate how transparency affects the probability of a financial crisis. They construct a model in which banks cannot distinguish between aggregate shocks and government policy, on the one hand, and firm' quality, on the other....
| Main Authors: | , |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/02/437731/transparency-liberalization-banking-crisis http://hdl.handle.net/10986/19851 |
| Summary: | The authors investigate how transparency
affects the probability of a financial crisis. They
construct a model in which banks cannot distinguish between
aggregate shocks and government policy, on the one hand, and
firm' quality, on the other. Banks may therefore
overestimate firms' returns and increase credit above
the level that would be optimal given the firms'
returns. Once banks discover their large exposure, they are
likely to roll over loans rather than declare their losses.
This delays the crisis but increases its magnitude. The
empirical evidence, based on data for 56 countries in
1977-97, supports this theoretical model. The authors find
that lack of transparency increases the probability of a
crisis following financial liberalization. This implies that
countries should focus on increasing transparency of
economic activity and government policy, as well as
increasing transparency n the financial sector, particularly
during a period of transition such as financial liberalization. |
|---|