Banks as Secret Keepers
52 Pages Posted: 19 Jun 2014 Last revised: 23 Mar 2016
Date Written: March 24, 2016
Banks produce short-term debt for transactions and storing value. The value of bank money must not vary over time so agents can easily trade this debt at par. This requires that no agent finds it profitable to produce costly private information about the bank's loans. To produce safe liquidity banks choose loans with high such costs. Capital markets cannot produce substitutes for bank money because they involve information revelation. They produce risky liquidity. This trade-off determines firms' choices between banks and capital markets for financing, and the aggregate amount of safe liquidity.
Keywords: Banks vs. Capital Markets, Financial Intermediation, Information and Opacity, Optimal Portfolio, Private Money
JEL Classification: G21, D82, G11, G14, E44
Suggested Citation: Suggested Citation