Regulatory Practices and the Impossibility to Extract Truthful Risk Information

I. INTRODUCTION Accurate estimates of the risk exposure in the banking industry are critical to regulators. This information allows not only to set precautionary measures to protect the banking industry, but also at individual level to adjust for premia in return for services offered by the regulator such as deposit insurance. However, banks are notoriously reluctant to disclose such information. For instance, banks in financial distress have clear incentives to keep this information private since detection may trigger regulatory intervention leading to severe changes in financial strategies and possibly financial sanctions.