Seminar
Reputational Contagion and Optimal Regulatory Forbearance
Alan Morrison (Oxford University)
Paul Woolley Research Initiative Seminar
IDEI, March 5, 2012, 12:30–14:00, room MF 323
Reference
Alan Morrison (Oxford University), “Reputational Contagion and Optimal Regulatory Forbearance”, Paul Woolley Research Initiative Seminar, IDEI, March 5, 2012, 12:30–14:00, room MF 323.
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 behaviour 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. Keywords: Contagion, Reputation, Bank Regulation
JEL codes
- G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages
- G28: Government Policy and Regulation
Research partnership
Paul Woolley Research Initiative