The strategic under-reporting of bank risk

Begley, T A and Purnanandam, A and Zheng, K (2017) The strategic under-reporting of bank risk. The Review of Financial Studies, 30 (10). pp. 3376-3415. ISSN 0893-9454

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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.

Item Type: Article
Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in Review of Financial Studies following peer review. The version of record: Taylor A. Begley, Amiyatosh Purnanandam, Kuncheng Zheng (2017) 'The strategic under-reporting of bank risk', Review of Financial Studies, 30 (10) pp. 3376-3415 is available online at: https://academic.oup.com/rfs/article-lookup/doi/10.1093/rfs/hhx036 and at: https://doi.org/10.1093/rfs/hhx036
Subjects: V > Value analysis
E > Equity capital
R > Risk
Subject Areas: Finance
DOI: 10.1093/rfs/hhx036
Date Deposited: 21 Dec 2016 14:14
Last Modified: 30 Oct 2017 09:49
URI: http://lbsresearch.london.edu/id/eprint/849

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