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Financial Distress And Banks'communication Policy In Crisis Times

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Author Info

  • Besancenot, Damien

    () (CEPN and University of Paris 13. Paris, France)

  • Vrânceanu, Radu

    () (ESSEC Business School, PB 50105, 95021 Cergy, France)

Abstract

This paper analyzes banks’ communication policies in crisis times and the role of imperfect information in enhancing banks' financial distress. If banks differ in their exposure to dubious assets, fragile banks may claim to be sound only in order to manipulate investors' expectations. Then sound banks must pay a larger interest rate than in a perfect information set-up. A stronger sanction for false information would improve the situation of the low-risk banks but would deteriorate the situation of the high-risk banks. The total effect on the economy-wide frequency of default of credit institutions is ambiguous. It can be shown that, in some cases, the optimal sanction is lower than the sanction that rules out any manipulatory behavior.

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Bibliographic Info

Article provided by Institute for Economic Forecasting in its journal Romanian Journal for Economic Forecasting.

Volume (Year): (2010)
Issue (Month): 1 (March)
Pages: 5-20
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Handle: RePEc:rjr:romjef:v::y:2010:i:1:p:5-20

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Related research

Keywords: financial distress; financial crisis; banks; disclosure; transparency;

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References

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  1. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-89, September.
  2. Claudio Borio, 2008. "The financial turmoil of 2007-?: a preliminary assessment and some policy considerations," BIS Working Papers 251, Bank for International Settlements.
  3. Diamond, Douglas W & Verrecchia, Robert E, 1991. " Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-59, September.
  4. Tito Cordella & Eduardo Levy Yeyati, 1997. "Public Disclosure and Bank Failures," IMF Working Papers 97/96, International Monetary Fund.
  5. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-62, November.
  6. Besancenot, Damien & Vranceanu, Radu, 2005. "Socially Efficient Managerial Dishonesty," ESSEC Working Papers DR 05005, ESSEC Research Center, ESSEC Business School.
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Cited by:
  1. Vranceanu, Radu, 2009. "Four Myths and a Financial Crisis," ESSEC Working Papers DR 09006, ESSEC Research Center, ESSEC Business School.

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