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Why Banks Should Keep Secrets

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  • Todd R. Kaplan

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Abstract

I present an example showing it is sometimes efficient for a bank to commit to a policy that keeps information about its risky assets private. Current practices in banking result in bankers having private information: demand deposits are non-contingent contracts, there are time lags before the public has access to updated balance sheets, and certain items on a bank's balance sheet are marked at book-value rather than market-value. The Savings & Loan failures in the 1980's have led to an increase in banking legislation such as the FIRREA of 1989 and the FDICIA of 1991. These laws affect the release of information about a bank's assets by creating a minimum capital requirement, imposing a new examination standard for banks' assets, and implementing a risk-based insurance scheme.

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Paper provided by University of Minnesota, Department of Economics in its series Working papers with number _005.

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Handle: RePEc:wop:minnec:_005

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  1. Bernardino Adao & Ted Temzelides, 1998. "Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 859-877, October.
  2. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-61, July.
  3. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
  5. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
  6. Bernadino Adao & Theodosios Temzelides, 1995. "Beliefs, competition, and bank runs," Working Papers 95-26, Federal Reserve Bank of Philadelphia.
  7. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  9. Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 177-193, March.
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Cited by:
  1. Balkenborg, Dieter & Kaplan, Todd R. & Miller, Tim, 2009. "Teaching Bank Runs with Classroom Experiments," MPRA Paper 18635, University Library of Munich, Germany.
  2. Frank Gigler & Thomas Hemmer, 2008. "On the welfare effects of allowing unlimited renegotiation in agency relationships," Economic Theory, Springer, vol. 37(2), pages 243-265, November.
  3. Todd Kaplan, 2012. "Communication of preferences in contests for contracts," Economic Theory, Springer, vol. 51(2), pages 487-503, October.
  4. Surajeet Chakravarty & Miguel A. Fonseca & Todd Kaplan, 2012. "An Experiment on the Causes of Bank Run Contagions," Discussion Papers 1206, Exeter University, Department of Economics.
  5. Stenzel, A. & Wagner, W.B., 2013. "Asset Opacity and Liquidity," Discussion Paper 2013-066, Tilburg University, Center for Economic Research.
  6. David Andolfatto & Fernando M. Martin, 2012. "Information disclosure and exchange media," Working Papers 2012-012, Federal Reserve Bank of St. Louis.

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