Financial Distress And Banks'communication Policy In Crisis Times

Damien Besancenot and Radu Vranceanu

Journal for Economic Forecasting, 2010, issue 1, 5-20

Abstract: This paper analyzes banks’ communication policies in crisis times and the role of imperfect information in enhancing banks' financial distress. If banks differ in their exposure to dubious assets, fragile banks may claim to be sound only in order to manipulate investors' expectations. Then sound banks must pay a larger interest rate than in a perfect information set-up. A stronger sanction for false information would improve the situation of the low-risk banks but would deteriorate the situation of the high-risk banks. The total effect on the economy-wide frequency of default of credit institutions is ambiguous. It can be shown that, in some cases, the optimal sanction is lower than the sanction that rules out any manipulatory behavior.

Keywords: financial distress; financial crisis; banks; disclosure; transparency (search for similar items in EconPapers)
JEL-codes: D82 E44 G21 (search for similar items in EconPapers)
Date: 2010
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Working Paper: Financial distress and banks' communication policy in crisis times (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:rjr:romjef:v::y:2010:i:1:p:5-20

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