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Financial Distress And Banks'communication Policy In Crisis Times

Author

Listed:
  • 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.

Suggested Citation

  • 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.
    • Handle: RePEc:rjr:romjef:v::y:2010:i:1:p:5-20
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    Cited by:

    1. is not listed on IDEAS
    2. Radu Vranceanu, 2009. "Four Myths and a Financial Crisis," Post-Print hal-00554704, HAL.

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    Keywords

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    JEL classification:

    • 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
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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