Working Paper: CEPR ID: DP15079
Authors: Ana Babus; Maryam Farboodi
Abstract: We explore a model in which banks strategically hold interconnected and opaque portfolios, despite increasing the likelihood they are subject to financial crises. In our framework, banks choose their degree of exposure to other banks to influence how investors can use their information. In equilibrium banks choose portfolios which are neither fully opaque, nor fully transparent. However, their portfolios are excessively interconnected to obfuscate investor information. Banks can create a degree of opacity that decreases welfare, and makes bank crises more likely. Our model is suggestive about the implications of asset securitization, as well as government bailouts.
Keywords: opacity; banking crises; interdependent portfolios
JEL Codes: G14; G21; D82; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| degree of opacity (Y20) | welfare outcomes (I38) |
| portfolio allocations (G11) | likelihood of financial crises (G01) |
| information availability (D83) | likelihood of financial crises (G01) |