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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

For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).

Related research

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 Where Reciprocators Can Hide Behind Probabilities," Post-Print hal-00572384, HAL.
  2. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  3. Baroni, Michel & Barthélémy, Fabrice & Mokrane, Mahdi, 2005. "A PCA Factor Repeat Sales Index (1973-2001) To Forecast Apartment Prices in Paris (France)," ESSEC Working Papers DR 05002, ESSEC Research Center, ESSEC Business School.
  4. 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.
  5. Radu Vranceanu, 2009. "Four Myths and a Financial Crisis," Post-Print hal-00554704, HAL.
  6. Batista, Catia & Potin, Jacques, 2008. "International Specialization and the Return to Capital, 1976-2000," ESSEC Working Papers DR 08001, ESSEC Research Center, ESSEC Business School.
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Cited by:
  1. Vranceanu, Radu & Besancenot, Damien, 2011. "Experimental Evidence on the ‘Insidious’ Illiquidity Risk," ESSEC Working Papers WP1107, ESSEC Research Center, ESSEC Business School.
  2. Radu Vranceanu & Damien Besancenot & Kim Huynh, 2009. "Desk rejection in an academic publication market model with matching frictions," Post-Print hal-00554732, HAL.

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