Economic Theory

, Volume 27, Issue 2, pp 341–357 | Cite as

Why banks should keep secrets

Research Articles

Summary.

We show that it is sometimes efficient for a bank to commit to a policy that keeps information about its risky assets private. Our model, based upon Diamond-Dybvig (1983), has the feature that banks acquire information about their risky assets before depositors acquire it. A bank has the option of using contracts where the middle-period return on deposits is contingent on this information, but by doing so it must also reveal the information. We derive the conditions on depositors’ preferences and banking technology for which a bank would prefer to keep information secret even though it must then use a non-contingent deposit contract.

Keywords and Phrases:

Deposit contracts Interim information. 

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Copyright information

© Springer-Verlag Berlin/Heidelberg 2006

Authors and Affiliations

  1. 1.University of ExeterDepartment of EconomicsExeterUK

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