Banks' incentives and inconsistent risk models

Matthew C. Plosser, João A. C. Santos

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

This paper investigates banks' incentive to bias the risk estimates they report to regulators. Within loan syndicates, we find that banks with less capital report lower risk estimates. Consistent with an effort to mitigate capital requirements, the sensitivity to capital is robust to bank fixed effects and greater for large, risky, and opaque credits. Also, low-capital banks' risk estimates have less explanatory power than those of high-capital banks with regard to loan prices, indicating that their estimates incorporate less information. Our results suggest banks underreport risk in response to capital constraints and highlight the perils of regulation premised on self-reporting.

Original languageEnglish
Pages (from-to)2080-2112
Number of pages33
JournalReview Of Financial Studies
Volume31
Issue number6
DOIs
Publication statusPublished - 1 Jun 2018

Fingerprint Dive into the research topics of 'Banks' incentives and inconsistent risk models'. Together they form a unique fingerprint.

Cite this