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The Strategic Underreporting of Bank Risk

Taylor A. Begley, Amiyatosh Purnanandam and Kuncheng Zheng

The Review of Financial Studies, 2017, vol. 30, issue 10, 3376-3415

Abstract: We show that banks significantly underreport the risk in their trading book when they have lower equity capital. Specifically, a decrease in a bank’s equity capital results in substantially more violations of its self-reported risk levels in the following quarter. Underreporting is especially frequent during the critical periods of high systemic risk and for banks with larger trading operations. We exploit a discontinuity in the expected benefit of underreporting present in Basel regulations to provide further support for a causal link between capital-saving incentives and underreporting. Overall, we show that banks’ self-reported risk measures become least informative precisely when they matter the most. Received April 30, 2015; editorial decision October, 27 2016 by Editor Itay Goldstein.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (51)

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The Review of Financial Studies is currently edited by Itay Goldstein

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