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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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Citations

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Cited by:
  1. Besancenot, Damien & Huynh, Kim & Vranceanu, Radu, 2009. "Desk rejection in an academic publication market model with matching frictions," ESSEC Working Papers DR 09008, ESSEC Research Center, ESSEC Business School.
  2. repec:cge:warwcg:75 is not listed on IDEAS
  3. repec:hal:cepnwp:halshs-00602107 is not listed on IDEAS
  4. repec:hal:wpaper:halshs-00602107 is not listed on IDEAS
  5. Vranceanu, Radu & Besancenot, Damien, 2011. "Experimental Evidence on the ‘Insidious’ Illiquidity Risk," ESSEC Working Papers WP1107, ESSEC Research Center, ESSEC Business School.

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