← Search

American Economic Review Vol. 107 No. 4 2017

Banks as Secret Keepers

Tri Vi Dang1; Gary Gorton2; Bengt Holmström3; Guillermo Ordoñez4

1 Department of Economics, Columbia University, International Affairs Building, 420 W 118 Street, New York, NY 10027 (e-mail: ) · 2 School of Management, Yale University, 135 Prospect Street, Box 208200, New Haven, CT 06520, and NBER (e-mail: ) · 3 Department of Economics, Massachusetts Institute of Technology, 50 Memorial Drive, Building E52, Cambridge, MA 02142, and NBER (e-mail: ) · 4 Department of Economics, University of Pennsylvania, 428 McNeil Building, 3718 Locust Walk, Philadelphia, PA, 19104, and NBER (e-mail: )

Abstract

Banks produce short-term debt for transactions and storing value. The value of this debt must not vary over time so agents can easily trade it at par like money. To produce money-like safe liquidity, banks keep detailed information about their loans secret, reducing liquidity if needed to prevent agents from producing costly private information about the banks' loans. Capital markets involve information revelation, so they produce risky liquidity. The trade-off between less safe liquidity and more risky liquidity determines which firms choose to fund projects through banks and which ones through capital markets.

DOI
10.1257/aer.20140782
Volume
107
Issue
4
Pages
1005-1029
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite