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Bank Runs, Bank Competition and Opacity

Toni Ahnert () and David Martinez-Miera

Staff Working Papers from Bank of Canada

Abstract: We model the opacity and deposit rate choices of banks that imperfectly compete for uninsured deposits, are subject to runs, and face a threat of entry. We show how shocks that increase bank competition or bank transparency increase deposit rates, costly withdrawals, and thus bank fragility. Therefore, perfect competition is not socially optimal. We also propose a theory of bank opacity. The cost of opacity is more withdrawals from a solvent bank, lowering bank profits. The benefit of opacity is to deter the entry of a competitor, increasing future bank profits. The excessive opacity of incumbent banks rationalizes transparency regulation.

Keywords: Financial institutions; Financial markets; Financial stability; Financial system regulation and policies; Wholesale funding (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2021-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-com and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:21-30

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