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Why banks should keep secrets

  • Todd Kaplan

    ()

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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File URL: http://hdl.handle.net/10.1007/s00199-004-0597-y
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 27 (2006)
Issue (Month): 2 (January)
Pages: 341-357

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Handle: RePEc:spr:joecth:v:27:y:2006:i:2:p:341-357
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  1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  2. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-97, November.
  3. 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.
  4. 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.
  5. Bernadino Adao & Theodosios Temzelides, 1995. "Beliefs, competition, and bank runs," Working Papers 95-26, Federal Reserve Bank of Philadelphia.
  6. 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.
  7. Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 177-193, March.
  8. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
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