Report Contents

June 1, 2021

Central Bank Research Hub

Bank Runs, Bank Competition and Opacity

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Originally published on by Bank of International Settlements . Link to original report

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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Bank of Canada Working Papers by Toni Ahnert and David Martinez-Miera

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