Institut d'AnÓlisi Econ˛mica
This paper studies a model of endogenous bank opacity. In the model, bank opacity is costly for
society because it reduces market discipline and encourages banks to take on too much risk. This
is true even in the absence of agency problems between banks and the ultimate bearers of the risk.
Banks choose to be inefficiently opaque if the composition of a bank's balance sheet is proprietary
information. Strategic behavior reduces transparency and increases the risk of a banking crisis.
The model can explain why empirically a higher degree of bank competition leads to increased
transparency. Optimal public disclosure requirements may make banks more vulnerable to a run for a
given investment policy, but they reduce the risk of a run through an improvement in market
discipline. The option of public stress tests is beneficial if the policy maker has access to
public information only. This option can be harmful if the policy maker has access to banks'
At the outset of the Great Recession, credit spreads and default rates soared
on corporate bond markets. At the same time, firms were exposed to a particularly
sharp rise in sales and growth volatility, while productivity experienced
the sharpest downturn of the post-war era. This paper employs an optimal contract
approach to security design and capital structure to show how an increase
in firm-level uncertainty can result in a rise of the default rate on corporate bonds
together with a drop in firm productivity and output. Key to the analysis is a misalignment
of the incentives of firm management and investors. Within a dynamic
general equilibrium model, I study the impact of exogenous variations in firm-level
uncertainty on real and financial aggregates. Uncertainty shocks of plausible size
typically cause a recession featuring a rise in default rates and a deleveraging of
the corporate sector. An important driver of the business cycle in this model are
fluctuations in the Solow residual which are not caused by technology shocks, but
by the time-varying severity of agency problems.