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Bank Capitalization As a Signal

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  • Daniel C. Hardy
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    Abstract

    The level of a bank‘s capitalization can effectively transmit information about its riskiness and therefore support market discipline, but asymmetry information may induce exaggerated or distortionary behavior: banks may vie with one another to signal confidence in their prospects by keeping capitalization low, and banks‘ creditors often cannot distinguish among them - tendencies that can be seen across banks and across time. Prudential policy is warranted to help offset these tendencies.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/114.

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    Length: 25
    Date of creation: 01 May 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/114

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    Related research

    Keywords: Banks; Economic models; probability; equation; bank capitalization; probability of default; present value; banking; equations; functional forms; random variable; dividend policy; probabilities; financial strength; banking sector; tier 1 capital; bank of england; banking business; markov process; bank capital; integral; random component; bank value; mathematica; bankrupt; cumulative distribution function;

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    1. International Monetary Fund, 2008. "Innovation in Banking and Excessive Loan Growth," IMF Working Papers 08/188, International Monetary Fund.
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