Banks face a dual mandate of raising low-cost deposits while avoiding liquidity risk. We
propose a novel mechanism whereby banks use portfolio opacity to meet this objective.
Specifically, banks choose opaque portfolios to secure cheap long-term funding while
trading off insolvency and illiquidity. We show that opacity lowers deposit rates but
leaves depositors with only noisy information about the bank’s solvency, making them

more prone to withdraw, especially when interest...

Banks face a dual mandate of raising cheap deposits while avoiding liquidity risk. We propose a novel mechanism whereby banks use portfolio opacity to meet this objective. Specifically, banks choose opaque portfolios to secure cheap long-term funding while trading off insolvency and illiquidity. We show that while opacity lowers deposit rates, it also leaves depositors with only noisy information about the bank’s solvency, making them...