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Opacity of Banks and Runs with Solvency

Author

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  • D'Avino, Carmela
  • Lucchetta, Marcella

Abstract

In absence of bank risk-taking behavior, opacity is defined as the inability of depositors, speculators and central banker to disentangle default risk and asset's return from the asset's value. We show the conditions under which opacity leads to runs on a solvent bank in equilibrium and uncertainty on fundamental values of the asset. The main repercussion of the opacity is, however, on the central bank's policy response which is inefficient during a banking crisis.

Suggested Citation

  • D'Avino, Carmela & Lucchetta, Marcella, 2010. "Opacity of Banks and Runs with Solvency," MPRA Paper 24166, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:24166
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    File URL: https://mpra.ub.uni-muenchen.de/24207/1/MPRA_paper_24207.pdf
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    References listed on IDEAS

    as
    1. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, August.
    2. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 733-771.
    3. Tito Cordella & Eduardo Levy Yeyati, 1998. "Public Disclosure and Bank Failures," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 110-131, March.
    4. 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.
    5. Arturo Estrella, 2004. "Bank Capital and Risk: Is Voluntary Disclosure Enough?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(2), pages 145-160, October.
    6. Wagner, Wolf, 2007. "Financial development and the opacity of banks," Economics Letters, Elsevier, vol. 97(1), pages 6-10, October.
    7. 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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    Cited by:

    1. repec:dau:papers:123456789/15008 is not listed on IDEAS
    2. François Guillemin & Hervé Alexandre & Catherine Refait-Alexandre, 2015. "Downgrades of sovereign credit ratings and impact on banks CDS spread: does disclosure by banks improve stability?," Post-Print hal-01622782, HAL.

    More about this item

    Keywords

    Opacity; Bank Runs; Central Bank Intervention; Cash-in-Market Pricing.;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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