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Optimal Preventive Bank Supervision Combining Random Audits and Continuous Intervention

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  • Mohamed Belhaj

    ()
    (Centrale Marseille (Aix-Marseille School of Economics), CNRS & EHESS)

  • Nataliya Klimenko

    ()
    (Aix-Marseille Université, Greqam)

Abstract

Early regulator interventions into problem banks are one of the key suggestions of Basel II. However, no guidance is given on their design. To fill this gap, we outline an incentive-based preventive supervision strategy that eliminates bad asset management in banks. Two supervision techniques are combined: continuous regulator intervention and random audits. Random audit technologies differ as to quality and cost. Our design ensures good management without excessive supervision costs, through a gradual adjustment of supervision effort to the bank's financial health. We also consider preventive supervision in a setting where audits can be delegated to an independent audit agency, showing how to induce agency compliance with regulatory instructions in the least costly way.

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Bibliographic Info

Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1201.

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Length: 36 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:aim:wpaimx:1201

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Web page: http://www.amse-aixmarseille.fr/en
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Keywords: banking supervision; random audit; incentives; moral hazard; delegation.;

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  1. Abel Elizalde, 2007. "From Basel I To Basel Ii: An Analysis Of The Three Pillars," Working Papers wp2007_0704, CEMFI.
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