Banks as Secret Keepers

NBER Working Paper No. 20255

Issued in June 2014

NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Monetary Economics



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.

Acknowledgments and Disclosures

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Document Object Identifier (DOI): 10.3386/w20255

Published: Tri Vi Dang & Gary Gorton & Bengt Holmström & Guillermo Ordoñez, 2017. "Banks as Secret Keepers," American Economic Review, vol 107(4), pages 1005-1029. citation courtesy of

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