Working Paper: CEPR ID: DP16207
Authors: Toni Ahnert; David Martinez-Miera
Abstract: 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.
Keywords: competition; entry; opacity; bank run; fragility; global games; competition policy; transparency regulation
JEL Codes: G01; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher competition (L13) | increased deposit rates (E43) |
| increased deposit rates (E43) | increased strategic complementarity in withdrawal decisions (C79) |
| increased strategic complementarity in withdrawal decisions (C79) | increased bank fragility (F65) |
| greater transparency (G38) | increased deposit rates (E43) |
| greater transparency (G38) | increased withdrawal incentives (J65) |
| increased withdrawal incentives (J65) | increased bank fragility (F65) |
| higher competition (L13) | increased bank fragility (F65) |
| greater transparency (G38) | increased bank fragility (F65) |
| banks prefer opacity (G21) | deter potential competitors (L49) |
| deter potential competitors (L49) | enhance future profitability (L21) |