The informational impact of prudential regulations

Kebin Ma and Tamas Vadasz

Journal of Financial Intermediation, 2024, vol. 59, issue C

Abstract: Banks take costly actions (such as capitalization, liquidity holding, and advanced risk management) to avoid financial distress and creditor runs. While directly affecting a bank’s risks, such actions can also signal the bank’s fundamentals. We show that prudential regulations have an informational impact: sufficiently tight regulations can eliminate inefficient separating equilibria in banks’ signaling game, thereby changing the information available to creditors and their incentives to run. When accounting for this informational impact, tightening regulations can improve banks’ payoffs and be considered bank incentive-compatible. We support this novel, information-based rationale for regulations with evidence from the US liquidity requirement.

Keywords: Prudential regulations; Signaling; Bank runs; Global games (search for similar items in EconPapers)
JEL-codes: G01 G11 G21 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:59:y:2024:i:c:s1042957324000196

DOI: 10.1016/j.jfi.2024.101091

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