The Hidden Costs of Strategic Opacity

Ana Babus and Maryam Farboodi

No 15079, CEPR Discussion Papers from Centre for Economic Policy Research

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 excessively interconnected to obfuscate investor information. 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 government bailouts.

Keywords: Opacity; Banking crises; Interdependent portfolios (search for similar items in EconPapers)
JEL-codes: D43 D82 G14 G21 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Hidden Costs of Strategic Opacity (2020)
Working Paper: The Hidden Costs of Strategic Opacity (2019)
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