Bank Capitalization As a Signal

Author/Editor:

Daniel C Hardy

Publication Date:

May 1, 2012

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2012/114

Subject:

Asset and liability management Banking Credit Distressed institutions Financial institutions Financial services Investment banking Money National accounts Return on investment Special purpose vehicle Tax incentives

English

Publication Date:

May 1, 2012

ISBN/ISSN:

9781475503357/1018-5941

Stock No:

WPIEA2012114

Pages:

25

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