Bank Competition, Bank Runs and Opacity

We examine the competition among and the opacity of banks subject to rollover risk. Banks imperfectly compete for uninsured deposits and choose the opacity of their risky investment. In a static setup, higher bank competition increases the deposit rate, which increases withdrawal incentives due to strategic complementarity and thus raises bank fragility. In a dynamic setup with entry, a theory of bank opacity arises. Opacity trades off a static cost of larger withdrawals and costly liquidation of investment with a dynamic benefit of deterring entry and reducing future competition. We use our framework to evaluate the regulation of competition or transparency. We find that greater competition increases deposit rates, fragility, and transparency, while minimum transparency regulation increases both current and future fragility and future competition.