NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Fighting Crises

Gary Gorton, Guillermo Ordoñez

NBER Working Paper No. 22787
Issued in October 2016
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, Monetary Economics

In fighting a financial crisis, opacity (keeping the names of banks borrowing at emergency lending facilities secret) and stigma (the cost of having a bank’s name revealed) are desirable to restore confidence. Lending facilities raise the perceived average quality of all banks’ assets. Opacity reduces the costs of these facilities, creating an information externality that prevents runs even on banks not participating in lending facilities. Stigma is costly but keeps banks from revealing their participation, making opacity sustainable. The key tool for implementing optimal opacity while fine tuning stigma is the haircut for bonds offered as collateral in lending facilities.

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Document Object Identifier (DOI): 10.3386/w22787

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