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The Informational Centrality of Banks

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Abstract

The equity and debt prices of large nonbank firms contain information about the future state of the banking system. In this sense, banks are informationally central. The amount of this information varies over time and over equity and debt. During a financial crisis banks are, by definition of a crisis, at risk of failure. Debt prices became about 50 percent more informative than equity prices about the future state of the banking system during the financial crisis of 2007-2009. This was partly due to investors' fears that banks might not be able to refinance the firms' debt.

Suggested Citation

  • Nathan Foley-Fisher & Gary Gorton & Stéphane Verani, 2024. "The Informational Centrality of Banks," Finance and Economics Discussion Series 2024-006, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-06
    DOI: 10.17016/FEDS.2024.006
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    3. Doran, Howard E, 1992. "Constraining Kalman Filter and Smoothing Estimates to Satisfy Time-Varying Restrictions," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 568-572, August.
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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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