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Banks as Secret Keepers

Tri Vi Dang, Gary Gorton, Bengt Holmstrom () and Guillermo Ordonez ()

No 20255, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Banks are optimally opaque institutions. They produce debt for use as a transaction medium (bank money), which requires that information about the backing assets - loans - not be revealed, so that bank money does not fluctuate in value, reducing the efficiency of trade. This need for opacity conflicts with the production of information about investment projects, needed for allocative efficiency. Intermediaries exist to hide such information, so banks select portfolios of information-insensitive assets. For the economy as a whole, firms endogenously separate into bank finance and capital market/stock market finance depending on the cost of producing information about their projects.

JEL-codes: D82 E44 G11 G14 G21 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-ban, nep-cta and nep-mac
Note: CF EFG ME
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Published as Tri Vi Dang & Gary Gorton & Bengt Holmström & Guillermo Ordoñez, 2017. "Banks as Secret Keepers," American Economic Review, vol 107(4), pages 1005-1029.

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