Financial distress and banks' communication policy in crisis times
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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