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Banks as Secret Keepers


  • 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.

Suggested Citation

  • Tri Vi Dang & Gary Gorton & Beng Holmstrom & Guillermo Ordonez, 2014. "Banks as Secret Keepers," PIER Working Paper Archive 14-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:14-022

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    References listed on IDEAS

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    Cited by:

    1. Matteo Maggiori & Emmanuel Farhi, 2015. "A Model of the International Monetary System," Working Paper 349586, Harvard University OpenScholar.
    2. Didier Brandao,Tatiana & Levine,Ross Eric & Schmukler,Sergio L., 2015. "Capital market financing, firm growth, and firm size distribution," Policy Research Working Paper Series 7353, The World Bank.
    3. Charles W. Calomiris & Matthew Jaremski, 2016. "Deposit Insurance: Theories and Facts," Annual Review of Financial Economics, Annual Reviews, vol. 8(1), pages 97-120, October.
    4. Giorgia Piacentino & Anjan Thakor & Jason Donaldson, 2015. "Bank Capital, Bank Credit and Unemployment," 2015 Meeting Papers 1403, Society for Economic Dynamics.
    5. Tatiana Didier & Ross Levine & Sergio L. Schmukler, 2014. "Capital Market Financing, Firm Growth, Firm Size Distribution," NBER Working Papers 20336, National Bureau of Economic Research, Inc.
    6. DeAngelo, Harry & Stulz, René M., 2015. "Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks," Journal of Financial Economics, Elsevier, vol. 116(2), pages 219-236.
    7. Gopalakrishnan, Balagopal, 2017. "What Does Matched Bank-Firm Data Tell Us about the Moral Hazard in Lending Decisions of State-Owned Banks in India? (Revised as on January 3, 2018)," IIMA Working Papers WP 2017-11-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    8. Robert C. Merton & Richard T. Thakor, 2015. "Customers and Investors: A Framework for Understanding Financial Institutions," NBER Working Papers 21258, National Bureau of Economic Research, Inc.
    9. Kozubovska, Mariolia, 2017. "The effect of US bank holding companies’ exposure to asset-backed commercial paper conduits on the information opacity and systemic risk," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 530-545.
    10. Gary Gorton, 2013. "The Development of Opacity in U.S. Banking," NBER Working Papers 19540, National Bureau of Economic Research, Inc.
    11. Alvarez, Fernando & Barlevy, Gadi, 2014. "Mandatory Disclosure and Financial Contagion," Working Paper Series WP-2014-4, Federal Reserve Bank of Chicago.
    12. Paul Glasserman & H. Peyton Young, 2016. "Contagion in Financial Networks," Journal of Economic Literature, American Economic Association, vol. 54(3), pages 779-831, September.
    13. Gary Gorton, 2015. "Stress for Success: A Review of Timothy Geithner's Financial Crisis Memoir," Journal of Economic Literature, American Economic Association, vol. 53(4), pages 975-995, December.
    14. Brancati, Emanuele & Macchiavelli, Marco, 2015. "The Role of Dispersed Information in Pricing Default: Evidence from the Great Recession," Finance and Economics Discussion Series 2015-79, Board of Governors of the Federal Reserve System (U.S.).
    15. Uras, Rasim Burak & Wagner, Wolf, 2017. "Efficient Lemons," CEPR Discussion Papers 11803, C.E.P.R. Discussion Papers.
    16. Bushman, Robert M., 2014. "Thoughts on financial accounting and the banking industry," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 384-395.
    17. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.
    18. Paul Glasserman, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    19. Glasserman, Paul & Young, H. Peyton, 2016. "Contagion in financial networks," LSE Research Online Documents on Economics 68681, London School of Economics and Political Science, LSE Library.
    20. Erwan Quintin & Cyril Monnet, 2014. "A Theory of Blind Trading," 2014 Meeting Papers 283, Society for Economic Dynamics.
    21. Beatty, Anne & Liao, Scott, 2014. "Financial accounting in the banking industry: A review of the empirical literature," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 339-383.

    More about this item


    Banks vs. Capital Markets; Financial Intermediation; Information and Opacity; Optimal Portfolio; Private Money;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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