NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Banks as Secret Keepers

Tri Vi Dang, Gary Gorton, Bengt Holmström, Guillermo Ordonez

NBER Working Paper No. 20255
Issued in June 2014
NBER Program(s):CF, EFG, ME

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.

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Document Object Identifier (DOI): 10.3386/w20255

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