Banks' risk race: A signaling explanation
AbstractMany observers argue that one of the major causes of the 2007-2009 recession was the abnormal accumulation of risk by banks. This paper provides a signaling explanation for this race for risk. If banks' returns can be observed while risk cannot, the less efficient banks can hide their type by taking more risks and paying the same returns as the more efficient banks. The latter can signal themselves by taking even higher risks and delivering bigger returns. The game presents several equilibria that are all characterized by excessive risk taking as compared to the perfect information case.
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Bibliographic InfoArticle provided by Elsevier in its journal International Review of Economics & Finance.
Volume (Year): 20 (2011)
Issue (Month): 4 (October)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/620165
Banking sector Risk strategy Signaling Imperfect information The Great Recession;
Other versions of this item:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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