Reputational contagion and Optimal Regulatory Forbearance

Morrison, Alan and White, Lucy (2013) Reputational contagion and Optimal Regulatory Forbearance. Journal of Financial Economics, 110 (3). pp. 642-658.

Abstract

Existing studies suggest that systemic crises may arise because banks either hold correlated assets, or are connected by interbank lending. This paper shows that common regulation is also a conduit for interbank contagion. One bank's failure may undermine confidence in the banking regulator's competence, and, hence, in other banks chartered by the same regulator. As a result, depositors withdraw funds from otherwise unconnected banks. The optimal regulatory response to this behavior can be privately to exhibit forbearance to a failing bank. We show that regulatory transparency improves confidence ex ante but impedes regulators' ability to stem panics ex post.

Item Type: Article
Keywords: Contagion; Reputation; Bank regulation; finance
Subject(s): Corporate reputation
Finance
Centre: Oxford University Centre for Corporate Reputation
Date Deposited: 18 Oct 2013 09:39
Last Modified: 01 Mar 2017 10:32
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/4857

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