The Hidden Costs of Strategic Opacity

69 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Ana Babus

Ana Babus

Washington University in St. Louis - Department of Economics

Maryam Farboodi

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

We explore a model in which banks strategically hold interconnected and opaque portfolios, despite increasing the likelihood they are subject to financial crises. In our framework, banks choose their degree of exposure to other banks to influence how investors can use their information. In equilibrium banks choose portfolios which are neither fully opaque, nor fully transparent. However, their portfolios are excessively interconnected to obfuscate investor information. Banks can create a degree of opacity that decreases welfare, and makes bank crises more likely. Our model is suggestive about the implications of asset securitization, as well as government bailouts.

Keywords: banking crises, interdependent portfolios, opacity

JEL Classification: D43, D82, G14, G21

Suggested Citation

Babus, Ana and Farboodi, Maryam, The Hidden Costs of Strategic Opacity (July 2020). CEPR Discussion Paper No. DP15079, Available at SSRN: https://ssrn.com/abstract=3661422

Ana Babus (Contact Author)

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

Maryam Farboodi

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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