Abstract
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.