Concealment of Risk and Regulation of Bank Risk Taking
AbstractThis paper analyzes the effectiveness of banking regulation when risk can be concealed from the regulator. Three banking regimes are considered: regulation with direct controls, incentives-based regulation, and laissez-faire banking. The relative performance of the three regimes depends on the effectiveness of monitoring. Regulation with direct controls is superior when monitoring effectiveness is low, while incentives-based regulation is superior when monitoring effectiveness is high. Laissez-faire banking is equivalent to incentives-based regulation if market analysts and the regulator with direct controls can better restrain banks' risk taking than can the market; this result applies when banks can conceal much of their risk from the regulator. Copyright 1990 by Kluwer Academic Publishers
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Bibliographic InfoArticle provided by Springer in its journal Journal of Regulatory Economics.
Volume (Year): 2 (1990)
Issue (Month): 4 (December)
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Web page: http://www.springerlink.com/link.asp?id=100298
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- Fischer, Klaus P. & Fournier, Eric M., 2002. "Does Corporate Governance Matter in Deposit Insurance? DI and Moral Hazard in Joint Stock and Mutual Financial Intermediaries," Cahiers de recherche 0206, CIRPEE.
- Arturo Estrella, 2004. "Bank Capital and Risk: Is Voluntary Disclosure Enough?," Journal of Financial Services Research, Springer, vol. 26(2), pages 145-160, October.
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- Richard W. Kopcke, 1991. "The capitalization and portfolio risk of insurance companies," Working Papers 91-3, Federal Reserve Bank of Boston.
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