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 rates are high. Thus, although opac-
ity boosts bank profits, in high-rate environments it leads banks to adopt excessively

opaque portfolios, increasing the likelihood of early, liquidity-driven failures.