Information Management in Banking Crises∗
Information Management in Banking Crises Joel Shapiroyand David Skeiez University of Oxford and Federal Reserve Bank of New York August 5, 2013 Abstract A regulator resolving a bank faces two audiences: depositors, who may run if they believe the regulator will not provide capital, and banks, which may take excess risk if they believe the regulator will provide capital. When the regulator’s cost of injecting capital is pri- vate information, it manages expectations by using costly signals: (i) A regulator with a low cost of injecting capital may forbear on bad banks to signal toughness and reduce risk taking, and (ii) A regula- tor with a high cost of injecting capital may bail out bad banks to increase confidence and prevent runs. Regulators perform more infor- mative stress tests when the market is pessimistic. Keywords: bank regulation, bailouts, reputation, financial crisis, sovereign debt crisis, stress tests JEL Codes: G01, G21, G28 We thank Mitchell Berlin, Elena Carletti, Brian Coulter, Frederic Malherbe, Juan Francisco Martinez, Alan Morrison, José-Luis Peydró Alcalde, Tarun Ramadorai, Peter Tufano and the audiences at the Bank of England, Ecole Polytechnique, EFMA 2013, EUI, LBS FIT working group, ISCTE, Queens College, UPF and U. Porto for helpful comments. We also thank the Editor and the Referees for detailed comments and suggestions. We thank Alex Bloedel, Mike Mariathasan, and Ali Palida for excellent research assistance. The views expressed in this paper represent those of the authors and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System. ySaïd Business School, University of Oxford.
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