Using Boot and Thakor model (1993), the paper summarizes for which parameter interval regarding regulator’s reputation the closure of banks could signalize imperfect monitoring of banks assets choice. If the regulator is non-benevolent, that is if he maximizes a welfare function that gives weight different from zero to his own reputation, the authors show that the private optimum policy (of the regulator) of banking closure increase the risk level banks bear comparing to the social optimum policy, which occurs when the regulator only maximizes the social welfare. This result, however, is only maintained under certain parameters interval. Under this interval, measures such as clear rules for banking closure to reduce the discretionary power of the regulator, and, for example, separation between the monitoring function and the closure function could incentive banks to make better portfolio choices, which would enable the regulator to decrease the systemic risk in the banking system.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number
170.