Bank Opaqueness and Intermediation

Abstract

Banks are believed to be opaque to outsiders, since opacity is a property of the assets that they hold. A social planner would like banks to be transparent, riskless and highly efficient intermediators of liquidity. However, these goals appear to be conflicting. Whether and how opacity and intermediation are connected is an important question of relevance to regulators, investors and the general public. The theoretical literature makes conflicting predictions about this relation. We formulate a theoretical model of opacity and intermediation and test the resulting conjectures on a large sample of US banks. We find that intermediation is positively associated with opacity, while controlling for a large number of other factors including fragility. These results imply that demanding full disclosure and transparency from banks may bring with it negative externalities in terms of intermediation, which policymakers may wish to take into account.

Keywords: Financial Institutions, Liquidity Creation, Regulation, Opacity

JEL Classification: C45, G21, G28, E44, E51