The Strategic Under-Reporting of Bank Risk

Taylor A. Begley, Amiyatosh Purnanandam, Kuncheng Zheng; The Strategic Underreporting of Bank Risk, The Review of Financial Studies, Volume 30, Issue 10, 1 pp. 337613415, October 2017, DOI: org/10.1093/rfs/hhx036

Ross School of Business Paper No. 1260

76 Pages Posted: 3 Dec 2014 Last revised: 13 Sep 2017

See all articles by Taylor A. Begley

Taylor A. Begley

Washington University in St. Louis - John M. Olin Business School

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Kuncheng (K.C.) Zheng

Northeastern University - D’Amore-McKim School of Business

Date Written: September 23, 2016

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.

Keywords: value-at-risk, risk-based capital requirements, risk measurement, systemic risk

JEL Classification: G20, G30

Suggested Citation

Begley, Taylor A. and Purnanandam, Amiyatosh and Zheng, Kuncheng (K.C.), The Strategic Under-Reporting of Bank Risk (September 23, 2016). Taylor A. Begley, Amiyatosh Purnanandam, Kuncheng Zheng; The Strategic Underreporting of Bank Risk, The Review of Financial Studies, Volume 30, Issue 10, 1 pp. 337613415, October 2017, DOI: org/10.1093/rfs/hhx036, Ross School of Business Paper No. 1260, Available at SSRN: https://ssrn.com/abstract=2532623 or http://dx.doi.org/10.2139/ssrn.2532623

Taylor A. Begley (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
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HOME PAGE: http://www.taylorbegley.com

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Kuncheng (K.C.) Zheng

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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