IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Banks' risk race: A signaling explanation

  • Radu Vranceanu

    ()

    (Economics Department - ESSEC Business School)

  • Damien Besancenot

    ()

    (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)

Many observers argue that the abnormal accumulation of risk by banks has been one of the major causes of the 2007-2009 financial turmoil. But what could have pushed banks to engage in such a risk race? The answer brought by this paper builds on the classical signaling model by Spence. If banks' returns can be observed while risk cannot, less efficient banks can hide their type by taking more risks and paying the same returns as the efficient banks. The latter can signal themselves by taking even higher risks and delivering bigger returns. The game presents several equilibria that are all characterized by excessive risk taking as compared to the perfect information case.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hal-essec.archives-ouvertes.fr/docs/00/55/47/19/PDF/09007_Vranceanu.pdf
Download Restriction: no

Paper provided by HAL in its series Post-Print with number hal-00554719.

as
in new window

Length:
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:hal:journl:hal-00554719
Note: View the original document on HAL open archive server: http://hal-essec.archives-ouvertes.fr/hal-00554719/en/
Contact details of provider: Web page: http://hal.archives-ouvertes.fr/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Vranceanu, Radu & Sutan, Angela & Dubart, Delphine, 2010. "Trust and Financial Trades: Lessons from an Investment Game Where Reciprocators Can Hide Behind Probabilities," ESSEC Working Papers DR 10007, ESSEC Research Center, ESSEC Business School.
  2. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
  3. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  4. John G. Riley, 1974. "Competitive Signalling," UCLA Economics Working Papers 050, UCLA Department of Economics.
  5. Allen N. Berger & Robert DeYoung, 1995. "Problem Loans and Cost Efficiency in Commercial Banks," Center for Financial Institutions Working Papers 96-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Richard Pomfret, 2009. "The Financial Sector and the Future of Capitalism," School of Economics Working Papers 2009-05, University of Adelaide, School of Economics.
  7. Batista, Catia & Potin, Jacques, 2006. "Stages of Diversification and Capital Accumulation in an Heckscher-Ohlin World, 1975-1995," ESSEC Working Papers DR 06008, ESSEC Research Center, ESSEC Business School.
  8. Claudio Borio, 2008. "The financial turmoil of 2007-?: a preliminary assessment and some policy considerations," BIS Working Papers 251, Bank for International Settlements.
  9. Haslem, John A. & Scheraga, Carl A. & Bedingfield, James P., 1999. "DEA efficiency profiles of U.S. banks operating internationally," International Review of Economics & Finance, Elsevier, vol. 8(2), pages 165-182, June.
  10. Douglas W. Diamond & Raghuram Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," NBER Working Papers 14739, National Bureau of Economic Research, Inc.
  11. Kahane, Yehuda, 1977. "Capital adequacy and the regulation of financial intermediaries," Journal of Banking & Finance, Elsevier, vol. 1(2), pages 207-218, October.
  12. repec:dgr:uvatin:20060015 is not listed on IDEAS
  13. Radu Vranceanu & Delphine Dubart & Maxime Laot, 2010. "Une échelle de mesure de la connaissance en raisonnement économique et résultats d'une enquête menée en décembre 2009," Post-Print hal-00542948, HAL.
  14. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December.
  15. Vranceanu, Radu, 2009. "Four Myths and a Financial Crisis," ESSEC Working Papers DR 09006, ESSEC Research Center, ESSEC Business School.
  16. Batista, Catia & Potin, Jacques, 2008. "International Specialization and the Return to Capital, 1976-2000," ESSEC Working Papers DR 08001, ESSEC Research Center, ESSEC Business School.
  17. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
  18. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  19. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  20. Baroni, Michel & Barthélémy, Fabrice & Mokrane, Mahdi, 2005. "A PCA Factor Repeat Sales Index (1973-2001) To Forecast Apartment Prices in Paris (France)," ESSEC Working Papers DR 05002, ESSEC Research Center, ESSEC Business School.
  21. Boot, Arnoud W A & Marinc, Matej, 2006. "Competition and Entry in Banking: Implications for Stability and Capital Regulation," CEPR Discussion Papers 5518, C.E.P.R. Discussion Papers.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-00554719. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.