The Strategic Underreporting of Bank Risk

Taylor A. Begley, Amiyatosh Purnanandam, Kuncheng Zheng

Research output: Contribution to journalArticlepeer-review

50 Scopus citations

Abstract

We show that banks significantly underreport 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. Underreporting is especially frequent during the critical periods of high systemic risk and for banks with larger trading operations. We exploit a discontinuity in the expected benefit of underreporting present in Basel regulations to provide further support for a causal link between capitalsaving incentives and underreporting. Overall, we show that banks' self-reported risk measures become least informative precisely when they matter the most.

Original languageEnglish
Pages (from-to)3376-3415
Number of pages40
JournalReview of Financial Studies
Volume30
Issue number10
DOIs
StatePublished - Oct 1 2017

Bibliographical note

Publisher Copyright:
© 2017 The Author. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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