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 language | English |
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Pages (from-to) | 3376-3415 |
Number of pages | 40 |
Journal | Review of Financial Studies |
Volume | 30 |
Issue number | 10 |
DOIs | |
State | Published - 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