The Hidden Costs of Strategic Opacity

Ana Babus and Maryam Farboodi
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Maryam Farboodi: Massachusetts Institute of Technology

No 1508, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We explore a model in which banks strategically hold interconnected and opaque portfolios, despite increasing the likelihood they are subject to financial crises. In our framework, banks choose their degree of exposure to other banks to influence how investors can use their information. In equilibrium banks choose portfolios which are neither fully opaque, nor fully transparent. However, their portfolios are interconnected beyond what is beneficial for diversification purposes. Banks can create a degree of opacity that decreases welfare, and makes bank crises more likely. Our model is suggestive about the implications of asset securitization, as well as of government bailouts.

Date: 2019
New Economics Papers: this item is included in nep-ban
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Related works:
Working Paper: The Hidden Costs of Strategic Opacity (2020)
Working Paper: The Hidden Costs of Strategic Opacity (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1508

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