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Information Management in Banking Crises

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  • Shapiro, Joel
  • Skeie, David

Abstract

A regulator resolving a bank faces two audiences: depositors, who may run if they believe the regulator will not provide capital, and banks, which may take excess risk if they believe the regulator will provide capital. When the regulator's cost of injecting capital is private information, it manages expectations by using costly signals: (i) A regulator with a low cost of injecting capital may forbear on bad banks to signal toughness and reduce risk taking, and (ii) A regulator with a high cost of injecting capital may bail out bad banks to increase confidence and prevent runs. Regulators perform more informative stress tests when the market is pessimistic.

Suggested Citation

  • Shapiro, Joel & Skeie, David, 2013. "Information Management in Banking Crises," CEPR Discussion Papers 9612, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9612
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    More about this item

    Keywords

    bank regulation; financial crisis; reputation; sovereign debt crisis; stress tests;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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