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Concealment of Risk and Regulation of Bank Risk Taking

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  • Kambhu, John

Abstract

This 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

Suggested Citation

  • Kambhu, John, 1990. "Concealment of Risk and Regulation of Bank Risk Taking," Journal of Regulatory Economics, Springer, vol. 2(4), pages 397-414, December.
    • Handle: RePEc:kap:regeco:v:2:y:1990:i:4:p:397-414
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    Cited by:

    1. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    2. 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.
    3. Arturo Estrella, 2004. "Bank Capital and Risk: Is Voluntary Disclosure Enough?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(2), pages 145-160, October.
    4. Richard W. Kopcke, 1991. "The capitalization and portfolio risk of insurance companies," Working Papers 91-3, Federal Reserve Bank of Boston.
    5. Luis Brites Pereira, 2006. "Taxation, bailouts and financial supervision," Nova SBE Working Paper Series wp483, Universidade Nova de Lisboa, Nova School of Business and Economics.

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