Consequences of Mandated Bank Liquidity Disclosures Anya Kleymenova* London Business School Regent’s Park London NW1 4SA, UK
[email protected] November 2013 PRELIMINARY Please do not quote or circulate without permission. Abstract This paper studies the capital market consequences of unique and unexpected mandatory disclosures of banks’ liquidity and the resulting changes in banks’ behavior. I employ a hand-collected sample of the disclosures of banks’ borrowing from the US Federal Reserve Discount Window (DW) during the financial crisis. I find that these disclosures contain positive incremental market information as they decrease banks’ cost of capital (measured by the equity bid-ask spreads and the cost of debt). However, I also find evidence of endogenous costs associated with more disclosure. I document that banks respond to the DW disclosures by increasing their liquidity holdings and decreasing risky assets. In line with the theoretical predictions of Goldstein and Sapra (2013), this finding indicates that, following the DW disclosures, banks try to avoid accessing the DW facility, despite its cost of capital benefits. JEL classification: G18, G21, G28, M41 Keywords: Liquidity disclosure, discount window, consequences of disclosure, bank liquidity, prudential regulation of banks. * I started work on this paper during my PhD research internship at the Bank of England. I would like to thank the chair of my dissertation committee, Florin Vasvari, as well as Rhiannon Sowerbutts from the Bank of England for their generous support and guidance throughout this project. Discussions with Pat Akey, Allen Berger, Christa Bouwman, Michael Crawley (discussant), Emmanuel De George, Atif Ellahie, Sapnoti Eswar, John Kuong, Elizabeth Klee, Yun Lou, Maria Loumioti, Clemens Otto, Richard Rosen (discussant), Oded Rozenbaum, Oleg Rubanov, Tjomme Rusticus, Stephen Schaefer, Sasan Saiy (discussant), Haresh Sapra, İrem Tuna, Oktay Urcan, Joana Valente, Robert Verrecchia, and Irina Zviadadze have been extremely helpful.