Opacity of banks and inefficient bank management : an analysis

Abstract

In absence of risk-taking behavior of banks, opacity is defined as the inability of depositors, speculators and central banker to disentangle default risk and asset return from a signal on the asset’s expected value. This paper introduces opacity in the bank-run model proposed by Allen and Gale (1998). The authors show the conditions under which opacity leads to a no-run equilibrium of an insolvent bank and to an inefficient central bank’s policy response. The model can be useful to explain how opacity hindered the smooth implementation of the Troubled Asset Relief Program in 2008.