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Banks' risk race: A signaling explanation

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  • Besancenot, Damien
  • Vranceanu, Radu

Abstract

Many 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 Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 20 (2011)
Issue (Month): 4 (October)
Pages: 784-791

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Handle: RePEc:eee:reveco:v:20:y:2011:i:4:p:784-791

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Web page: http://www.elsevier.com/locate/inca/620165

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Keywords: Banking sector Risk strategy Signaling Imperfect information The Great Recession;

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References

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  1. Radu Vranceanu & Angela Sutan & Delphine Dubart, 2011. "Trust and financial trades : lessons from an investment game wher reciprocators can hide behind probabilities," Post-Print hal-00572384, HAL.
  2. Radu Vranceanu & Delphine Dubart & Maxime Laot, 2010. "Une échelle de mesure de la connaissance en raisonnement économique et résultats d'une enquête menée en décembre 2009," Post-Print hal-00542948, HAL.
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  18. Arnoud W.A. Boot & Matej Marinc, . "Competition and Entry in Banking: Implications for Stability and Capital Regulation," Tinbergen Institute Discussion Papers 06-015/2, Tinbergen Institute.
  19. Batista, Catia & Potin, Jacques, 2006. "Stages of Diversification and Capital Accumulation in an Heckscher-Ohlin World, 1975-1995," ESSEC Working Papers DR 06008, ESSEC Research Center, ESSEC Business School.
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Citations

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Cited by:
  1. Radu Vranceanu & Damien Besancenot & Kim Huynh, 2009. "Desk rejection in an academic publication market model with matching frictions," Post-Print hal-00554732, HAL.
  2. Powell, Andrew & Maier, Antonia & Miller, Marcus, 2012. "Prudent Banks and Creative Mimics: Can we tell the difference?," CAGE Online Working Paper Series 75, Competitive Advantage in the Global Economy (CAGE).
  3. Damien Besancenot & Radu Vranceanu, 2011. "Experimental Evidence On The 'Insidious' Illiquidity Risk," Working Papers halshs-00602107, HAL.
  4. Damien Besancenot & Radu Vranceanu, 2011. "Experimental Evidence on the 'Insidious' Illiquidity Risk," Post-Print hal-00607867, HAL.

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