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Incentives for effective risk management

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  • Danielsson, Jon
  • Jorgensen, Bjorn N.
  • de Vries, Casper G.

Abstract

Under the new Capital Accord, banks choose between two different types of risk management systems, the standard or the internal rating based approach. The paper considers how a bank's preference for a risk management system is affected by the presence of supervision by bank regulators. The model uses a principal–agent setting between a bank's owner and its risk management. The main conclusion is that previously unregulated institutions can be expected to switch to the lower quality standard approach subsequent to becoming regulated, i.e., the presence of regulation may induce a bank to decrease the quality of its risk management system. Published in Journal of Banking and Finance (2002) 26, 1407-25.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 26 (2002)
Issue (Month): 7 (July)
Pages: 1407-1425

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Handle: RePEc:eee:jbfina:v:26:y:2002:i:7:p:1407-1425

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References

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  1. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  2. Merton, Robert C., 1977. "On the cost of deposit insurance when there are surveillance costs," Working papers 903-77., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Hughes, John S., 1982. "Agency Theory and Stochastic Dominance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(03), pages 341-361, September.
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Cited by:
  1. Pérignon, Christophe & Smith, Daniel R., 2010. "The level and quality of Value-at-Risk disclosure by commercial banks," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 362-377, February.
  2. Godbillon-Camus, Brigitte & Godlewski, Christophe, 2005. "Credit risk management in banks: Hard information, soft Information and manipulation," MPRA Paper 1873, University Library of Munich, Germany.
  3. Hałaj, Grzegorz & Kok, Christoffer, 2014. "Modeling emergence of the interbank networks," Working Paper Series 1646, European Central Bank.
  4. Norvald Instefjord & Kouji Sasaki, 2007. "Proprietary trading losses in banks: do banks invest sufficiently in control?," Annals of Finance, Springer, vol. 3(3), pages 329-350, July.
  5. Frésard, Laurent & Pérignon, Christophe & Wilhelmsson, Anders, 2011. "The pernicious effects of contaminated data in risk management," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2569-2583, October.
  6. Szego, Giorgio, 2002. "Measures of risk," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1253-1272, July.
  7. Keppo, Jussi & Kofman, Leonard & Meng, Xu, 2010. "Unintended consequences of the market risk requirement in banking regulation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2192-2214, October.

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