Transparency And Safe Debt Creation

Tanya S. Paul, University of Pennsylvania


Banks provide an essential role in the economy, dispensing safe debt to consumers through deposit creation. This study examines a cost of transparency in banks: its effect on safe debt creation. Recent theories in financial intermediation argue that information can impair banks’ ability to create safe debt by making deposits sensitive to information, reducing their stability. This study examines these recent theories empirically in the context of public listings of US banks, which represent a large and salient shift in banks’ transparency and information environment. I find that a public listing is associated with lower uninsured deposit inflows. This association is stronger when the depositors have stronger incentives to leave the bank, when the information is more relevant to depositors, when depositors have more outside options, and when the bank engages in more ex-ante risk taking. Furthermore, depositors appear to learn from the information revealed in stock prices rather than information produced through the media or by equity analysts. Overall, this study provides evidence consistent with the idea that increased transparency can be harmful to deposit creation.