Banks as Secret Keepers
By Tri Vi Dang, Gary B. Gorton, Bengt R. Holmstrom, Guillermo Ordoñez. 2017
340 citations recorded by the source corpus.
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.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/7b0518cbb1610373f4cdcf7fbe7066d15c1e5b0e
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Citations in the corpus
- Understanding the Role of Debt in the Financial System (2015, positive): “The enhanced stability of bank debt can be socially valuable; see eg Kaplan (2006), Breton (2007), Dang et al (2014), and Monnet and Quintin (2013).”
- Can currency competition work? (2016, methodology): “The possibility of having a private monetary arrangement consistent with Friedman’s optimum quantity of money has recently been studied by Monnet and Sanches (2015) and Andolfatto, Berentsen, and Waller (2016).”
- A Model of the International Monetary System (2018, neutral): “32This piecewise linear demand function could also be rationalized with liquidity needs arising from investment (see for example Holmstrom and Tirole (1997), Farhi and Tirole (2012), Dang et al. (2014)).”