Bank Capitalization as a Signal. By Daniel C. Hardy
IMF Working Paper No. 12/114
May 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25894.0
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.
Tuesday, May 8, 2012
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