Runs Versus Lemons: Information Disclosure and Fiscal Capacity

62 Pages Posted: 27 May 2015

See all articles by Miguel Faria-e-Castro

Miguel Faria-e-Castro

Federal Reserve Bank of St. Louis

Joseba Martinez

London Business School - Department of Economics

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2015

Abstract

We characterize the optimal use of information disclosure and fiscal backstops during financial crises. In our model, financial crises force governments to choose between runs and lemons. Revealing information about banks’ assets reduces adverse selection in credit markets, but it can also create inefficient runs on weak banks. A fiscal backstop mitigates this risk and allows the government to pursue a high disclosure strategy. A government with a strong fiscal position is more likely to run informative stress tests than a government with a weak fiscal position. As a result, such a government is also less likely to rely on outright bailouts.

Keywords: bailouts, credit guarantees, deposit insurance, fiscal backstop, stress tests

JEL Classification: E5, E6, G1, G2

Suggested Citation

Faria-e-Castro, Miguel and Martinez, Joseba and Philippon, Thomas, Runs Versus Lemons: Information Disclosure and Fiscal Capacity (May 2015). CEPR Discussion Paper No. DP10614, Available at SSRN: https://ssrn.com/abstract=2610749

Miguel Faria-e-Castro (Contact Author)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Joseba Martinez

London Business School - Department of Economics ( email )

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Regent's Park
London NW1 4SA
United Kingdom

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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