Financial Intermediation and Flights to Safety

I develop a continuous-time game between a population of investors and an intermediary whose type is private information and whose portfolio allocation is neither observable nor contractible. I define and characterize a sequential equilibrium of the game and solve for a Markovian equilibrium where investors' posterior beliefs are the key state variable. In my model, demand for riskless assets undergoes dramatic changes that resemble the episodes of flight to safety observed during financial crises. I show that a risk-neutral intermediary chooses a portfolio that minimizes risk when beliefs are near the threshold below which the intermediary is terminated