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Why banks should keep secrets

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  • Todd Kaplan

Abstract

We show that it is sometimes efficient for a bank to commit to a policy that keeps information about its risky assets private. Our model, based upon Diamond-Dybvig (1983), has the feature that banks acquire information about their risky assets before depositors acquire it. A bank has the option of using contracts where the middle-period return on deposits is contingent on this information, but by doing so it must also reveal the information. We derive the conditions on depositors’ preferences and banking technology for which a bank would prefer to keep information secret even though it must then use a non-contingent deposit contract. Copyright Springer-Verlag Berlin/Heidelberg 2006

Suggested Citation

  • Todd Kaplan, 2006. "Why banks should keep secrets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(2), pages 341-357, January.
    • Handle: RePEc:spr:joecth:v:27:y:2006:i:2:p:341-357
    DOI: 10.1007/s00199-004-0597-y
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    References listed on IDEAS

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    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    3. Ted Temzelides & Bernandino Adao, 1995. "Beliefs, Competition, and Bank Runs," Finance 9511001, University Library of Munich, Germany.
    4. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. repec:bla:jfinan:v:43:y:1988:i:3:p:749-61 is not listed on IDEAS
    6. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Fall), pages 3-16.
    7. Verrecchia, Re, 1982. "The Use Of Mathematical-Models In Financial Accounting," Journal of Accounting Research, Wiley Blackwell, vol. 20, pages 1-42.
    8. Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 177-193, March.
    9. Bernardino Adao & Ted Temzelides, 1998. "Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 859-877, October.
    10. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
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    Citations

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    Cited by:

    1. Romans Pancs, 2015. "Efficient dark markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(3), pages 605-624, August.
    2. Stenzel, A. & Wagner, W.B., 2013. "Asset Opacity and Liquidity," Other publications TiSEM 36533529-29b8-4e85-9abd-0, Tilburg University, School of Economics and Management.
    3. Dieter Balkenborg & Todd Kaplan & Timothy Miller, 2011. "Teaching Bank Runs with Classroom Experiments," The Journal of Economic Education, Taylor & Francis Journals, vol. 42(3), pages 224-242, July.
    4. David Andolfatto & Fernando Martin, 2013. "Information Disclosure and Exchange Media," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 527-539, July.
    5. Stenzel, André, 2018. "Security design with interim public information," Journal of Mathematical Economics, Elsevier, vol. 76(C), pages 113-130.
    6. Jungherr, Joachim, 2018. "Bank opacity and financial crises," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 157-176.
    7. Ryuichiro Izumi, 2021. "Opacity: Insurance and Fragility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 146-169, April.
    8. Jeremy Bertomeu & Davide Cianciaruso, 2018. "Verifiable disclosure," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 65(4), pages 1011-1044, June.
    9. Stenzel, A. & Wagner, W.B., 2013. "Asset Opacity and Liquidity," Discussion Paper 2013-066, Tilburg University, Center for Economic Research.
    10. Todd Kaplan, 2012. "Communication of preferences in contests for contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(2), pages 487-503, October.
    11. Chakravarty, Surajeet & Choo, Lawrence & Fonseca, Miguel A. & Kaplan, Todd R., 2021. "Should regulators always be transparent? a bank run experiment," European Economic Review, Elsevier, vol. 136(C).
    12. Biancini, Sara & Verdier, Marianne, 2023. "Bank-platform competition in the credit market," International Journal of Industrial Organization, Elsevier, vol. 91(C).
    13. Chakravarty, Surajeet & Fonseca, Miguel A. & Kaplan, Todd R., 2014. "An experiment on the causes of bank run contagions," European Economic Review, Elsevier, vol. 72(C), pages 39-51.
    14. André Stenzel & Wolf Wagner, 2022. "Opacity, liquidity and disclosure requirements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(5-6), pages 658-689, May.
    15. Frank Gigler & Thomas Hemmer, 2008. "On the welfare effects of allowing unlimited renegotiation in agency relationships," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(2), pages 243-265, November.
    16. Wagner, Wolf & Uras, Burak, 2017. "Efficient Lemons," CEPR Discussion Papers 11803, C.E.P.R. Discussion Papers.
    17. Timmermann, Allan & Schmidt, Lawrence & , & Wermers, Russ, 2017. "Transparency, Investor Information Acquisition, and Money Market Fund Risk Rebalancing during the 2011-12 Eurozone Crisis," CEPR Discussion Papers 11895, C.E.P.R. Discussion Papers.
    18. Karlo Kauko, 2016. "Does Opaqueness Make Equity Capital Expensive for Banks?," Revista de Economía del Rosario, Universidad del Rosario, vol. 17(2), pages 203-227, February.

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    More about this item

    Keywords

    Deposit contracts; Interim information.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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