Imperfect Information Transmission from Banks to Investors: Macroeconomic Implications

39 Pages Posted: 2 Oct 2018 Last revised: 24 Dec 2019

See all articles by Nicolás Figueroa

Nicolás Figueroa

University of Chile

Oksana Leukhina

Federal Reserve Bank of St Louis

Carlos A. Ramírez

Board of Governors of the Federal Reserve System

Date Written: September, 2018

Abstract

Our goal is to elucidate the interaction of banks' screening effort and strategic information production in loan-backed asset markets using a general equilibrium framework. Asset quality is unobserved by investors, but banks may purchase error-prone ratings. The premium paid on highly rated assets emerges as the main determinant of banks' screening effort. The fact that rating strategies reflect banks' private information about asset quality helps keep this premium high. Conventional regulatory policies interfere with this decision margin, thereby reducing signaling value of high ratings and exacerbating the credit misallocation problem. We propose a tax/subsidy scheme that induces efficiency.

Keywords: credit misallocation, information asymmetry, information production, screening effort, rising asset complexity, mandatory rating, mandatory ratings disclosure

JEL Classification: G01, G24, G28

Suggested Citation

Figueroa, Nicolás and Leukhina, Oksana and Ramírez, Carlos, Imperfect Information Transmission from Banks to Investors: Macroeconomic Implications (September, 2018). FRB St. Louis Working Paper No. 2018-18, Available at SSRN: https://ssrn.com/abstract=3258968 or http://dx.doi.org/10.20955/wp.2018.018

Nicolás Figueroa (Contact Author)

University of Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

Oksana Leukhina

Federal Reserve Bank of St Louis ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

Carlos Ramírez

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.carlosrc.com/

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