Banks as Secret Keepers

53 Pages Posted: 30 Jun 2014

See all articles by Tri Vi Dang

Tri Vi Dang

Columbia University - Department of Economics

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Bengt R. Holmström

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 2014

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.

Suggested Citation

Dang, Tri Vi and Gorton, Gary B. and Holmström, Bengt R. and Ordoñez, Guillermo, Banks as Secret Keepers (June 2014). NBER Working Paper No. w20255, Available at SSRN: https://ssrn.com/abstract=2460574

Tri Vi Dang (Contact Author)

Columbia University - Department of Economics ( email )

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Gary B. Gorton

Yale School of Management ( email )

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Yale University - Yale Program on Financial Stability

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Bengt R. Holmström

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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HOME PAGE: http://www.ecgi.org

Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

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