Description
title: Pros and cons of transparency of risk exposure to stakeholders
According to the topic from the professor write the response.
Topic:
Financial Institutions depend on the trust of their customers to a much greater extent than many other areas. Commercial banks that lose the faith of the depositors may be subject to bank runs. I pay my life insurance premiums today on the expectation that the insurance company will be able to pay a claim in 50+ years for now.
According to the topic from the professor write the response.
Topic:
Financial Institutions depend on the trust of their customers to a much greater extent than many other areas. Commercial banks that lose the faith of the depositors may be subject to bank runs. I pay my life insurance premiums today on the expectation that the insurance company will be able to pay a claim in 50+ years for now.
So, how much transparency is good?
Here is the policy dilemma: If the government requires FI’s to disclose very detailed information on their risk exposures, shareholders may be in a better position to properly assess the risk-reward of investing in the FI’s stock, and will “reward” the ones taking reasonable risks, and “punish” the ones taking excessive risks. Essentially, letting the market police itself.
On the other hand, depositors/customers/insureds may look at that same risk exposure data, and simply pull out of any FI that looks scary. Presumably, this will lead to lost revenues, weakening the business, and possibly leading to its failure: the very outcome the government is trying to avoid.
What to do?