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Financial distress and banks' communication policy in crisis times

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Author Info

  • Besancenot, Damien

    ()
    (CEPN and University Paris 13)

  • Vranceanu, Radu

    ()
    (ESSEC Business School)

Abstract

This 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 Info

Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 08018.

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Length: 18 pages
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:ebg:essewp:dr-08018

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Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
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Web page: http://www.essec.edu/
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Related research

Keywords: Banks; Disclosure; Financial Crisis; Transparency;

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References

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  1. Jean-Charles Rochet & Jean Tirole, 1996. "Interbank lending and systemic risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
  2. Eduardo Levy Yeyati & Tito Cordella, 1997. "Public Disclosure and Bank Failures," IMF Working Papers 97/96, International Monetary Fund.
  3. Claudio Borio, 2008. "The financial turmoil of 2007-?: a preliminary assessment and some policy considerations," BIS Working Papers 251, Bank for International Settlements.
  4. Besancenot, Damien & Vranceanu, Radu, 2005. "Socially Efficient Managerial Dishonesty," ESSEC Working Papers DR 05005, ESSEC Research Center, ESSEC Business School.
  5. 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.
  6. 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.
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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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