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Bank Capitalization As a Signal

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  • Mr. Daniel C Hardy

Abstract

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.

Suggested Citation

  • Mr. Daniel C Hardy, 2012. "Bank Capitalization As a Signal," IMF Working Papers 2012/114, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2012/114
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    References listed on IDEAS

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    Cited by:

    1. Mr. Daniel C Hardy, 2013. "Bank Resolution Costs, Depositor Preference, and Asset Encumbrance," IMF Working Papers 2013/172, International Monetary Fund.

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