Wednesday, August 11, 2021

Bank Runs, Bank Competition and Opacity

Bank Runs, Bank Competition and Opacity


Toni Ahnert

Government of Canada - Bank of Canada; Centre for Economic Policy Research (CEPR); Systemic Risk Centre - LSE

David Martinez-Miera

Universidad Carlos III de Madrid - Department of Business Administration; Center for Economic Policy Research


We model the opacity and deposit rate choices of banks that imperfectly compete for uninsured deposits, are subject to runs, and face a threat of entry. We show how shocks that increase bank competition or bank transparency increase deposit rates, costly withdrawals, and thus bank fragility. Therefore, perfect competition is not socially optimal. We also propose a theory of bank opacity. The cost of opacity is more withdrawals from a solvent bank, lowering bank profits. The benefit of opacity is to deter the entry of a competitor, increasing future bank profits. The excessive opacity of incumbent banks rationalizes transparency regulation.

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