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Bank Capitalization as a Signal

Bank Capitalization as a Signal by Daniel C. Hardy
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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.
International Monetary Fund; May 2012
25 pages; ISBN 9781475561500
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Title: Bank Capitalization as a Signal
Author: Daniel C. Hardy