Role of Ethics In Transparent Financial System: The Impact of Transparency on the Stability of Financial Institutions

Abstract

The paper presents a theory of optimal transparency in the financialsystem when financial institutions have short-term liabilities and are exposedto rollover risk. Our analysis indicates that transparency enhances thestability of the financial system during crises but may have a destabilizingeffect during normal economic times. Thus, the optimal level of transparency iscontingent on the state of the economy, with the regulator increasingdisclosure in times of crises.