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Communicating Bailout Policy and Risk Taking in the Banking Industry


  • Jakob Bosma


This paper considers the effects of imperfectly communicated information about whether a regulator initiates a bailout program for financially distressed banks. The theoretical framework allows for determining whether, and to what extent, it is optimal for a regulator to be imprecise in communicating its bank bailout strategy. Banks do not only rely on their prediction of the regulator's action, but also on their beliefs about other banks' predictions to infer the regulator's strategy. Results indicate that the regulator may substitute higher capital adequacy requirements for being less precise in communicating whether to initiate a bailout program to maintain risk taking by banks.

Suggested Citation

  • Jakob Bosma, 2011. "Communicating Bailout Policy and Risk Taking in the Banking Industry," DNB Working Papers 277, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:277

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    References listed on IDEAS

    1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    2. Cordella, Tito & Yeyati, Eduardo Levy, 2003. "Bank bailouts: moral hazard vs. value effect," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 300-330, October.
    3. Wilko Bolt & Alexander F. Tieman, 2004. "Banking Competition, Risk and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 783-804, December.
    4. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
    5. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    6. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and private information in monetary policy models," BIS Working Papers 138, Bank for International Settlements.
    7. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    8. Charles A. E. Goodhart & Haizhou Huang, 1999. "A model of the lender of last resort," Proceedings, Federal Reserve Bank of San Francisco.
    9. Jamal Ibrahim Haidar, 2009. "The mark-to-market valuation and executive pay package regulations within the 2009 US (Bailout) Emergency Economic Stabilization Act," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 12(3), pages 189-199.
    10. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
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    Cited by:

    1. Eijffinger, Sylvester C W & Nijskens, Rob, 2012. "A dynamic analysis of bank bailouts and constructive ambiguity," CEPR Discussion Papers 8953, C.E.P.R. Discussion Papers.

    More about this item


    bank bailout support; noisy communication; regulation; risk taking;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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