Working Paper: NBER ID: w22787
Authors: Gary Gorton; Guillermo Ordoñez
Abstract: In fighting a financial crisis, opacity (keeping the names of banks borrowing at emergency lending facilities secret) and stigma (the cost of having a bank’s name revealed) are desirable to restore confidence. Lending facilities raise the perceived average quality of all banks’ assets. Opacity reduces the costs of these facilities, creating an information externality that prevents runs even on banks not participating in lending facilities. Stigma is costly but keeps banks from revealing their participation, making opacity sustainable. The key tool for implementing optimal opacity while fine tuning stigma is the haircut for bonds offered as collateral in lending facilities.
Keywords: financial crisis; central banking; opacity; stigma; lending facilities
JEL Codes: E32; E58; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Opacity (Y60) | Reduced costs of lending facilities (G21) |
| Reduced costs of lending facilities (G21) | Preventing runs on banks (E44) |
| Stigma (J70) | Prevents banks from revealing participation in lending facilities (G21) |
| Prevents banks from revealing participation in lending facilities (G21) | Sustaining opacity mechanism (L15) |
| Opacity (Y60) | Increased confidence among depositors (G28) |
| Increased confidence among depositors (G28) | Reducing likelihood of bank runs (E44) |
| Stigma (J70) | Aligning incentives of banks with those of the government (G28) |
| Aligning incentives of banks with those of the government (G28) | Maintaining perceived average quality of banks without full transparency (G21) |