Bank Capitalization As a Signal

Daniel Hardy

No 2012/114, IMF Working Papers from International Monetary Fund

Abstract: The level of a bank‘s capitalization can effectively transmit information about its riskiness and therefore support market discipline, but asymmetry information may induce exaggerated or distortionary behavior: banks may vie with one another to signal confidence in their prospects by keeping capitalization low, and banks‘ creditors often cannot distinguish among them - tendencies that can be seen across banks and across time. Prudential policy is warranted to help offset these tendencies.

Keywords: WP; net present value; high-yield bank; break-even point; low-yield bank; partial derivative; Bank capitalization; pro-cyclicality; signaling games; investment opportunity; financing ratio; value function; Distressed institutions; Investment banking; Special purpose vehicle; Credit; Return on investment; Global (search for similar items in EconPapers)
Pages: 25
Date: 2012-05-01
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Citations: View citations in EconPapers (1)

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