Fighting Crises

Gary Gorton and Guillermo Ordonez

No 22787, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In fighting a financial crisis, opacity (keeping the names of banks borrowing at emergency lending facilities secret) and stigma (the cost of having a bank’s name revealed) are desirable to restore confidence. Lending facilities raise the perceived average quality of all banks’ assets. Opacity reduces the costs of these facilities, creating an information externality that prevents runs even on banks not participating in lending facilities. Stigma is costly but keeps banks from revealing their participation, making opacity sustainable. The key tool for implementing optimal opacity while fine tuning stigma is the haircut for bonds offered as collateral in lending facilities.

JEL-codes: E32 E58 G01 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
Note: AP EFG ME
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