Reputational Contagion and Optimal Regulatory Forbearance

By Alan D. Morrison, Alan D. Morrison, Lucy White. Social Science Research Network, 2013

136 citations recorded by the source corpus.

Existing studies suggest that systemic crises may arise because banks either hold correlated assets, or are connected by interbank lending. This paper shows that common regulation is also a conduit for interbank contagion. One bank's failure may undermine confidence in the banking regulator's competence, and, hence, in other banks chartered by the same regulator. As a result, depositors withdraw funds from otherwise unconnected banks. The optimal regulatory response to this behavior can be privately to exhibit forbearance to a failing bank. We show that regulatory transparency improves confidence ex ante but impedes regulators' ability to stem panics ex post.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8c5ebc5caec6c6c7dbd466c53fd0af29c6e06b2e

Citations in the corpus

• Financial Accounting in the Banking Industry: A Review of the Empirical Literature (2014, unknown): “Their interpretation of risk-relevance of securitization in the pre-crisis period is different from Niu and Richardson (2006). In addition, their findings also suggest that rather than abandoning the sales accounting treatment for securitizations, better information about implicit guarantees should ”