Bank capital and risk: Is voluntary disclosure enough?

This paper considers whether banks have an incentive to disclose accurate information concerning their risk and capital adequacy. State-of-the-art capital regulation relies on quantitative capital requirements, bank supervision, and public disclosure of information to the markets. Is voluntary regulatory disclosure of risk information sufficient to achieve policy objectives The game-theoretic model of this paper suggests that voluntary disclosure can be usefully supplemented with other regulatory tools, in particular with direct supervision and financial market discipline.