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Banks as Secret Keepers

Tri Vi Dang (), Gary Gorton (), Bengt Holmstrom () and Guillermo Ordonez ()
Additional contact information
Tri Vi Dang: Department of Economics, Columbia University
Gary Gorton: Department of Economics, Yale University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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.

Keywords: Banks vs. Capital Markets; Financial Intermediation; Information and Opacity; Optimal Portfolio; Private Money (search for similar items in EconPapers)
JEL-codes: G21 D82 G11 G14 E44 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2014-06-01
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cta, nep-mac and nep-ppm
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Journal Article: Banks as Secret Keepers (2017) Downloads
Working Paper: Banks as Secret Keepers (2014) Downloads
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