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Why Banks Should Keep Secrets

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  • Todd R. Kaplan

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Abstract

I present an example showing it is sometimes efficient for a bank to commit to a policy that keeps information about its risky assets private. Current practices in banking result in bankers having private information: demand deposits are non-contingent contracts, there are time lags before the public has access to updated balance sheets, and certain items on a bank's balance sheet are marked at book-value rather than market-value. The Savings & Loan failures in the 1980's have led to an increase in banking legislation such as the FIRREA of 1989 and the FDICIA of 1991. These laws affect the release of information about a bank's assets by creating a minimum capital requirement, imposing a new examination standard for banks' assets, and implementing a risk-based insurance scheme.

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  • Todd R. Kaplan, "undated". "Why Banks Should Keep Secrets," Working papers _005, University of Minnesota, Department of Economics.
  • Handle: RePEc:wop:minnec:_005
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    File URL: http://www.econ.umn.edu/~todd/risky.ps
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    References listed on IDEAS

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    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, pages 1767-1797.
    2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, pages 401-419.
    3. Bernadino Adao & Theodosios Temzelides, 1995. "Beliefs, competition, and bank runs," Working Papers 95-26, Federal Reserve Bank of Philadelphia.
    4. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-761, July.
    7. Ted Temzelides & Bernandino Adao, 1995. "Beliefs, Competition, and Bank Runs," Finance 9511001, EconWPA.
    8. 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, pages 3-16.
    9. Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, pages 177-193.
    10. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 14-23.
    11. 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.
    12. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
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    Citations

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    Cited by:

    1. Romans Pancs, 2015. "Efficient dark markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 605-624.
    2. Dieter Balkenborg & Todd Kaplan & Timothy Miller, 2011. "Teaching Bank Runs with Classroom Experiments," The Journal of Economic Education, Taylor & Francis Journals, pages 224-242.
    3. Balkenborg, Dieter & Vermeulen, Dries, 2014. "Universality of Nash components," Games and Economic Behavior, Elsevier, pages 67-76.
    4. Chakravarty, Surajeet & Fonseca, Miguel A. & Kaplan, Todd R., 2014. "An experiment on the causes of bank run contagions," European Economic Review, Elsevier, pages 39-51.
    5. Andr? Kurmann & Christopher Otrok, 2013. "News Shocks and the Slope of the Term Structure of Interest Rates," American Economic Review, American Economic Association, vol. 103(6), pages 2612-2632, October.
    6. Stenzel, A. & Wagner, W.B., 2013. "Asset Opacity and Liquidity," Discussion Paper 2013-066, Tilburg University, Center for Economic Research.
    7. David Andolfatto & Fernando Martin, 2013. "Information Disclosure and Exchange Media," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 527-539, July.
    8. Todd Kaplan, 2012. "Communication of preferences in contests for contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 487-503.
    9. Frank Gigler & Thomas Hemmer, 2008. "On the welfare effects of allowing unlimited renegotiation in agency relationships," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 243-265.
    10. Uras, Rasim Burak & Wagner, Wolf, 2017. "Efficient Lemons," CEPR Discussion Papers 11803, C.E.P.R. Discussion Papers.
    11. Gallagher, Emily & Schmidt, Lawrence & Timmermann, Allan G & Wermers, Russ, 2017. "Transparency, Investor Information Acquisition, and Money Market Fund Risk Rebalancing during the 2011-12 Eurozone Crisis," CEPR Discussion Papers 11895, C.E.P.R. Discussion Papers.
    12. Stenzel, André & Wagner, Wolf, 2015. "Opacity and Liquidity," CEPR Discussion Papers 10665, C.E.P.R. Discussion Papers.
    13. Karlo Kauko, 2016. "Does Opaqueness Make Equity Capital Expensive for Banks?," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO, pages 203-227.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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