Reporting Rules in Bank Runs
Dr. Ronghuo Zheng
Assistant Professor of Accounting
McCombs School of Business
University of Texas at Austin
We study the role of reporting rules in the context of bank runs. In our model, a financial institution receives an early but imprecise estimate of the performance of its investment and issues a report subject to a reporting rule. We find that, from a financial-stability standpoint, the optimal reporting rule requires full disclosure when the financial institution’s early estimate is sufficiently unfavorable, but no disclosure otherwise. Importantly, the threshold below which the financial institution reports should be tailored to the financial institution’s exposure to bank-run risk In particular, the optimal reporting threshold is non-monotonic and U-shaped in the bank-run risk We also relate our results to current accounting standards for asset impairments.
