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Optimal supervisory policies and depositor-preference laws

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  • Henri Pagès

    (Fondation Banque de France pour la Recherche)

  • João A. C. Santos

    (Federal Reserve Bank of New York)

Abstract

When supervisors have imperfect information about the soundness of banks, they may be unaware of insolvency problems that develop in the interval between on-site examinations. Supervising banks more often will alleviate this problem but will increase the costs of supervision. This paper analyzes the trade-offs that supervisors face between the cost of supervision and their need to monitor banks effectively. We first characterize the optimal supervisory policy, in terms of the time between examinations and the closure rule at examinations, and compare it with the policy of an independent supervisor. We then show that making this supervisor accountable for deposit insurance losses in general reduces the excessive forbearance of the independent supervisor and may also improve on the time between examinations. Finally, we extend our analysis to the impact of depositor-preference laws on supervisors' monitoring incentives and show that these laws may lead to conflicting effects on the time between examinations and closure policy vis-à-vis the social optimum.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 131.

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Length: 42 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:bis:biswps:131

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Keywords: Deposit Insurance; Depositor Preference; Supervision;

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References

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Citations

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Cited by:
  1. Décamps, Jean-Paul & Rochet, Jean-Charles & Roger, Benoît, 2003. "The Three Pillars of Basel II, Optimizing the Mix," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 179, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Klüh, Ulrich, 2005. "Safety Net Design and Systemic Risk: New Empirical Evidence," Discussion Papers in Economics, University of Munich, Department of Economics 662, University of Munich, Department of Economics.
  3. Mohamed Belhaj & Nataliya Klimenko, 2012. "Optimal Preventive Bank Supervision: Combining Random Audits and Continuous Intervention," Working Papers, HAL halshs-00790464, HAL.
  4. Loriana Pelizzon & Stephen Schaefer, 2007. "Pillar 1 versus Pillar 2 under Risk Management," NBER Chapters, National Bureau of Economic Research, Inc, in: The Risks of Financial Institutions, pages 377-416 National Bureau of Economic Research, Inc.
  5. Rochet, Jean-Charles, 2003. "Rebalancing the 3 Pillars of Basel 2," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 224, Institut d'Économie Industrielle (IDEI), Toulouse.

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