PUBLIC DISCLOSURE AND BANK FAILURES

We study how public disclosure of banks' risk exposure affects banks' risk taking incentives and assess the impact of the presence of inform ed depositors on the soundness of the banking system. We find that, wh en banks have complete control over the volatility of their loan portf olio, public disclosure reduces the probability of banking crises. How ever, when banks do not control their risk exposure, the presence of i nformed depositors may increase the probability of bank failures.