Regulatory Practices and the Impossibility to Extract Truthful Risk Information

Leoni, Dr. Patrick (2006) Regulatory Practices and the Impossibility to Extract Truthful Risk Information. UNSPECIFIED. (Unpublished)

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We consider a regulator providing deposit insurance to a bank with private informataion about its investment portfolio. Following current regulatory practices, we assume that the regulator does not commit to audit and sanction after any risk report from the bank. We show that, in absence of commitment, the socially optimal contract leads a high-risk bank to misreport its risk with positive probability in most cases. Wer also isolate cases when truthful risk report is optimal. We this extablish that extraction of truthful risk information is not socially optimal in most cases given current regulatioy practices.

Item Type: Other
Keywords: Banking Regulation, Partial Commitment, Asymmetric Information, Adverse Selection
Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
Item ID: 446
Depositing User: Ms Sandra Doherty
Date Deposited: 21 Nov 2006
Refereed: No

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