A Study Of The Relationship Of Bank Disclosure And Bank Risk Taking Under Partially Implicit Insurance System

ABSTRACT:Market discipline has been one pillar of Basel Accords, along with Minimum capital constraints and supervisory review. The concrete performance of market discipline is disclosure. Bank disclosure reflects the operating conditions and degree of risk. Investors make decisions according to the bank disclosure. Investors require higher rewards towards banks which take excessive risk. So, in the equilibrium state, investors tend to minish the risk taking to reduce "the financing cost. This indicates that the more information bank disclosure to the public, the stronger the market discipline is.However, disclosure can play a role in market discipline need some precondition. Only when investors are sensitive to the bank disclosure, they are likely to take market discipline action. The government has repeatedly on bank bailout shows that although our country has not yet establish a deposit insurance system, but the implicit insurance system has already established. This are bound to influence the investors’ sensibility. Our country implement a partially implicit insurance, but the bank type is different, the probability bank receive rescue from government is different. This paper explores the paradigm between Banks and investors behavior from the perspective of game analysis, deeply cognize the interaction mechanism between disclosure and bank risk-taking behavior under implicit deposit insurance. We found that if information disclosure is large enough, banks which are not surely rescued by the government choose the steady risk-taking strategy. Under implicit deposit insurance system, Banks tend to take excessive risk and the degree of implicit deposit insurance will weaken the constraint effect of information disclosure, and use empirical evidence testifies relevant conclusion. This has important theoretical significance and application value. And put forwards policy suggestions:regulators should improve the level of bank mandatory disclosure, so as to achieve the purpose of the constraints on bank risk-taking; in order to strengthen the role of information disclosure. The government should gradually change implicit deposit insurance system to explicit deposit insurance system. This can not only guarantee the interests of investors, but also clear responsibilities, as well as to improve the enthusiasm of investors pay close attention to the bank disclosure. And provide important theoretical basis and decision support to regulators.