Opacity: Insurance and Fragility

39 Pages Posted: 15 Jan 2020

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2019

Abstract

What are the effects of banks holding opaque, complex assets? Should regulators require bank assets to be more transparent? I study these questions in a model of financial intermediation where opacity determines how long the realized value of an asset remains unknown. By allowing a bank to sell assets before the realization is known, opacity provides insurance to the bank's depositors. However, higher opacity also increases depositors' incentives to join a bank run. In choosing the level of opacity, therefore, a bank faces a trade-off between providing insurance and increasing fragility. If depositors can accurately observe the level of opacity, banks will choose the socially efficient level. If depositors are unable to observe this choice, however, banks will have an incentive to become overly opaque and regulation to limit opacity can improve welfare.

Keywords: Opacity, Bank runs, Insurance, Banking regulation

JEL Classification: G01, G21, G28

Suggested Citation

Izumi, Ryuichiro, Opacity: Insurance and Fragility (December 4, 2019). Proceedings of the 4th Chapman Conference on Money & Finance on Liquidity: Pricing, Management and Financial Stability, Available at SSRN: https://ssrn.com/abstract=3519598 or http://dx.doi.org/10.2139/ssrn.3519598

Ryuichiro Izumi (Contact Author)

Wesleyan University ( email )

Middletown, CT 06459
United States

HOME PAGE: http://www.ryuichiroizumi.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
25
Abstract Views
412
PlumX Metrics