Why banks should keep secrets
We show that it is sometimes efficient for a bank to commit to a policy that keeps information about its risky assets private. Our model, based upon Diamond-Dybvig (1983), has the feature that banks acquire information about their risky assets before depositors acquire it. A bank has the option of using contracts where the middle-period return on deposits is contingent on this information, but by doing so it must also reveal the information. We derive the conditions on depositors’ preferences and banking technology for which a bank would prefer to keep information secret even though it must then use a non-contingent deposit contract. Copyright Springer-Verlag Berlin/Heidelberg 2006
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Volume (Year): 27 (2006)
Issue (Month): 2 (January)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
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"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Bernadino Adao & Theodosios Temzelides, 1995.
"Beliefs, competition, and bank runs,"
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- Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 177-193, March.
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