Information Management in Banking Crises

Shapiro, Joel and Skeie, David R. (2013) Information Management in Banking Crises. Centre for Economic Policy Research Discussion Paper.

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A regulator resolving a bank faces two audiences: depositors, who may run if they believe the regulator will not provide capital, and banks, which may take excess risk if they believe the regulator will provide capital. When the regulator's cost of injecting capital is private information, it manages expectations by using costly signals: (i) A regulator with a low cost of injecting capital may forbear on bad banks to signal toughness and reduce risk taking, and (ii) A regulator with a high cost of injecting capital may bail out bad banks to increase confidence and prevent runs. Regulators perform more informative stress tests when the market is pessimistic.

Item Type: Other Working Paper
Additional Information: Please use the URL above to access this working paper on SSRN.
Keywords: bank regulation, financial crisis, reputation, sovereign debt crisis, stress tests, finance
Subject(s): Finance
Date Deposited: 17 Sep 2014 10:28
Last Modified: 19 Sep 2018 08:46

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