The strategic under-reporting of bank risk

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


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.

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Item Type: Article
Subject Areas: Finance
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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: and at:

Date Deposited: 21 Dec 2016 14:14
Date of first compliant deposit: 16 Dec 2016
Subjects: Value analysis
Equity capital
Last Modified: 16 Jun 2024 01:52

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