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Journal articles (2011), International Review of Economics and Finance, 20 (4), pp. 784-791

Banks' Risk Race: A Signaling Explanation

BESANCENOT D., VRANCEANU Radu

Many observers argue that one of the major causes of the 2007-2009 recession was the abnormal accumulation of risk by banks. This paper provides a signaling explanation for this race for risk. If banks' returns can be observed while risk cannot, the less efficient banks can hide their type by taking more risks and paying the same returns as the more efficient banks. The latter can signal themselves by taking even higher risks and delivering bigger returns. The game presents several equilibria that are all characterized by excessive risk taking as compared to the perfect information case. Link to the article

BESANCENOT, D. and VRANCEANU, R. (2011). Banks' Risk Race: A Signaling Explanation. International Review of Economics and Finance, 20(4), pp. 784-791.

Keywords : #Banking-sector, #Risk-strategy, #Signaling, #Imperfect-information, #The-Great-Recession