Information Management in Banking Crises

54 Pages Posted: 3 Sep 2013

See all articles by Joel D. Shapiro

Joel D. Shapiro

University of Oxford - Said Business School

David R. Skeie

University of Warwick - Warwick Business School

Date Written: August 2013

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.

Keywords: bank regulation, financial crisis, reputation, sovereign debt crisis, stress tests

JEL Classification: G01, G21, G28

Suggested Citation

Shapiro, Joel D. and Skeie, David R., Information Management in Banking Crises (August 2013). CEPR Discussion Paper No. DP9612, Available at SSRN: https://ssrn.com/abstract=2319937

Joel D. Shapiro (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

David R. Skeie

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://www.wbs.ac.uk/about/person/david-skeie

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