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Banks as Secret Keepers

Listed author(s):
  • Tri Vi Dang

    ()

    (Department of Economics, Columbia University)

  • Gary Gorton

    ()

    (Department of Economics, Yale University)

  • Beng Holmstrom

    ()

    (Department of Economics, MIT and NBER)

  • Guillermo Ordonez

    ()

    (Department of Economics, University of Pennsylvania)

Banks are optimally opaque institutions. They produce debt for use as a transaction medium (bank money), which requires that information about the backing assets – loans – not be revealed, so that bank money does not fluctuate in value, reducing the efficiency of trade. This need for opacity conflicts with the production of information about investment projects, needed for allocative efficiency. Intermediaries exist to hide such information, so banks select portfolios of information-insensitive assets. For the economy as a whole, firms endogenously separate into bank finance and capital market/stock market finance depending on the cost of producing information about their projects.

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File URL: http://economics.sas.upenn.edu/system/files/14-022.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 14-022.

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Length: 52 pages
Date of creation: 01 Jun 2014
Handle: RePEc:pen:papers:14-022
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  1. Régis Breton, 2002. "Monitoring and the Acceptability of Bank Money," Post-Print halshs-00256937, HAL.
  2. Hirtle, Beverly, 2006. "Stock Market Reaction to Financial Statement Certification by Bank Holding Company CEOs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1263-1291, August.
  3. Hanson, Samuel G. & Shleifer, Andrei & Stein, Jeremy C. & Vishny, Robert W., 2015. "Banks as patient fixed-income investors," Journal of Financial Economics, Elsevier, vol. 117(3), pages 449-469.
  4. Allen Berger & Sally Davies, 1998. "The Information Content of Bank Examinations," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(2), pages 117-144, October.
  5. 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.
  6. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
  7. Federal Reserve Bank of St. Louis & David Andolfatto, 2010. "On the Social Cost of Transparency in Monetary Economies," 2010 Meeting Papers 980, Society for Economic Dynamics.
  8. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, 02.
  9. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 273-305, August.
  10. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
  11. Gorton, Gary, 1999. "Pricing free bank notes," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 33-64, August.
  12. DeYoung, Robert, et al, 2001. "The Information Content of Bank Exam Ratings and Subordinated Debt Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 900-925, November.
  13. Bessler, Wolfgang & Nohel, Tom, 1996. "The stock-market reaction to dividend cuts and omissions by commercial banks," Journal of Banking & Finance, Elsevier, vol. 20(9), pages 1485-1508, November.
  14. Jones, Jeffrey S. & Lee, Wayne Y. & Yeager, Timothy J., 2012. "Opaque banks, price discovery, and financial instability," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 383-408.
  15. Régis Breton, 2002. "Monitoring and the Acceptability of Bank Money," Post-Print halshs-00256937, HAL.
  16. 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.
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