Banks as Secret Keepers

Dang, Tri Vi; Gorton, Gary B.; Holmström, Bengt R.; Ordoñez, Guillermo

doi:10.2139/ssrn.2456200

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Banks as Secret Keepers

PIER Working Paper

52 Pages Posted: 19 Jun 2014 Last revised: 23 Mar 2016

See all articles by Tri Vi Dang

Tri Vi Dang

Columbia University - Department of Economics

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Bengt R. Holmström

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 24, 2016

Abstract

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

Dang, Tri Vi and Gorton, Gary B. and Holmström, Bengt R. and Ordoñez, Guillermo, Banks as Secret Keepers (March 24, 2016). PIER Working Paper, Available at SSRN: https://ssrn.com/abstract=2456200 or http://dx.doi.org/10.2139/ssrn.2456200