The Leverage Effect of Bank Disclosures

The general view underlying bank regulation is that disclosures provide market discipline and reduce banks’ risk-taking incentives. We show can increase leverage risk. reason stems from the interaction between insured uninsured debt. Bank agency problem debt equity, thereby lowering cost of for banks. By issuing short-term repaid ahead deposits when economic conditions deteriorate, banks dilute deposits. Higher levels subsidy provided by deposit insurance, which increases identify under this negative effect dominates standard effect, so providing through