 Credibility, Reputation and De-Risking in Global Banking: Evidence from a Theoretical ModelMichael Brei, Lauren Cato and R. Delisle Worrell Post-Print from HAL Abstract: This paper investigates the de-risking phenomenon from the perspective of an international bank's decision to de-risk in a foreign market, where there is asymmetric information and costly monitoring. We consider three adverse shocks to a foreign affiliate's (i) perceived credibility, (ii) costs of monitoring, and (iii) reputation, as reflected in a loss of franchise value. We show that the headquarters' incentives to reduce international exposures are prompted by increasing funding and monitoring costs and by falling franchise values. Distortions arise because adverse credibility shocks make funding rates less responsive to actual risk choices, and impairments in the bank's reputation negatively affect franchise values. All else equal, this reduces the bank's incentives to retain and monitor the foreign affiliate, and risks increase. The risk effects are most pronounced in the case of credibility shocks, and incentives to reduce international exposures are strongest when reputational risks affect headquarters. Keywords: asymmetric information; de-risking; perceptions (search for similar items in EconPapers) Published in Journal of Globalization and Development, 2020, ⟨10.1515/jgd-2018-0022⟩ There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02497954 Access Statistics for this paper More papers in Post-Print from HAL |
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