Bank Capitalization As a Signal

May 1, 2012

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.

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

Keywords: Bank capitalization, break-even point, Credit, Distressed institutions, financing ratio, Global, high-yield bank, Investment banking, investment opportunity, low-yield bank, net present value, partial derivative, pro-cyclicality, Return on investment, signaling games, Special purpose vehicle, value function, WP

Pages:
25
Volume:
2012
DOI:
https://doi.org/10.5089/9781475503357.001
Issue:
114
Series:
Working Paper No. 2012/114
Stock No:
WPIEA2012114
ISBN:
9781475503357
ISSN:
1018-5941

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