Journal of Financial Economics Vol. 110 No. 3 2013
Reputational contagion and optimal regulatory forbearance
open access
Abstract
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.
- DOI
- 10.1016/j.jfineco.2013.08.011
- Volume
- 110
- Issue
- 3
- Pages
- 642-658
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref