Financial distress and banks' communication policy in crisis times
AbstractThis short paper analyzes banks' communication policies in crisis times and the role of imperfect information in enhancing banks' distress. If banks differ in their exposure to risky assets, fragile banks may claim to be solid only in order to manipulate investors' expectations. Then solid 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 deteriorate the situation of the high-risk banks. The total effect on defaulting credit institutions is ambiguous. It is shown that, in some cases, the optimal sanction is lower than the sanction that rules out any manipulatory behaviour.
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Bibliographic InfoPaper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 08018.
Length: 18 pages
Date of creation: Nov 2008
Date of revision:
Banks; Disclosure; Financial Crisis; Transparency;
Other versions of this item:
- Besancenot, Damien & Vrânceanu, Radu, 2010. "Financial Distress And Banks'communication Policy In Crisis Times," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 5-20, March.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-07 (All new papers)
- NEP-BAN-2009-03-07 (Banking)
- NEP-CTA-2009-03-07 (Contract Theory & Applications)
- NEP-FMK-2009-03-07 (Financial Markets)
- NEP-MAC-2009-03-07 (Macroeconomics)
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