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The strategic under-reporting of bank risk

Journal

Review of Financial Studies

Subject

Finance

Publishing details

Review of Financial Studies 2017 Vol 30:10 p 3376-3451

Authors / Editors

Begley T;Purnanandam A;Zheng K

Publication Year

2017

Abstract

We show that banks significantly under-report the risk in their trading book when they have lower equity capital. Specifically, a decrease in a bank’s equity capital results in substantially more violations of its self-reported risk levels in the following quarter. The under-reporting is especially high during the critical periods of high systemic risk and for banks with larger trading operations. We exploit a discontinuity in the expected benefit of under-reporting present in Basel regulations to provide further support for a causal link between capital-saving incentives and under-reporting. Overall, we show that banks’ self-reported risk measures become least informative precisely when they matter the most.

Keywords

Value-at-risk; risk-based capital requirements; risk measurement; systemic risk

Available on ECCH

No


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