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Opacity of Banks and Runs with Solvency

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  • D'Avino, Carmela
  • Lucchetta, Marcella

Abstract

In absence of bank risk-taking behavior, opacity is defined as the inability of depositors, speculators and central banker to disentangle default risk and asset's return from the asset's value. We show the conditions under which opacity leads to runs on a solvent bank in equilibrium and uncertainty on fundamental values of the asset. The main repercussion of the opacity is, however, on the central bank's policy response which is inefficient during a banking crisis.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24166.

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Date of creation: 2010
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Handle: RePEc:pra:mprapa:24166

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Keywords: Opacity; Bank Runs; Central Bank Intervention; Cash-in-Market Pricing.;

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  1. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  2. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox Of Liquidity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 733-771, August.
  3. Eduardo Levy Yeyati & Tito Cordella, 1997. "Public Disclosure and Bank Failures," IMF Working Papers 97/96, International Monetary Fund.
  4. Arturo Estrella, 2004. "Bank Capital and Risk: Is Voluntary Disclosure Enough?," Journal of Financial Services Research, Springer, vol. 26(2), pages 145-160, October.
  5. Wagner, Wolf, 2007. "Financial development and the opacity of banks," Economics Letters, Elsevier, vol. 97(1), pages 6-10, October.
  6. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
  7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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