Policy Implications of Using Audits to Detect Bank Insolvencies
AbstractWe present a model where a regulator has to decide how to tackle the potential insolvency of a bank in a context of asymmetric information. We show that, when it can audit the bank, the regulator is unlikely to choose a policy of bailout to induce the bank to reveal its insolvency. We show that, in some circumstances, the regulator can induce the bank to reveal its insolvency by threatening to randomize its decision to nationalize the bank.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 651.
Date of creation: Dec 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-01 (All new papers)
- NEP-BAN-2012-02-01 (Banking)
- NEP-CTA-2012-02-01 (Contract Theory & Applications)
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