Revised article published in the Journal of Financial Intermediation 9 (July 2000): 298-319.
Banking crises have continued to emerge in recent years, contributing to severe economic contractions in Japan, Russia, and Southeast Asia. In response, international organizations have advocated enhanced market discipline, encouraging countries to improve bank disclosure policies. Despite these recommendations, most countries have failed to improve disclosure. One reason so little progress has been made is that neither the proponents nor the opponents of enhanced disclosure policies have persuasive empirical evidence to support their views on potential costs and benefits of such a policy. This paper fills that gap by examining the impact of requiring the release of supervisory information on troubled U.S. banks during a severe banking crisis. We find that improving disclosure at troubled U.S. banks during the banking crisis was not destabilizing and did provide conditions for market discipline to work more effectively. These findings support the public policy proposal of enhanced bank disclosure, even at a time when experiencing a banking crisis.