An Incentive Based Regulatory System: A Bridge Too Far
AbstractThis paper argues that the operation of the financial sector as a whole will not be as effective if market discipline is relied upon as the only tool of financial regulation. Before enacting any incentive mechanisms, there must be adequate built-in measures to prevent the exploitation of information asymmetries as well as greater harmonisation and co-ordination of regulatory standards between countries. The paper considers the "incentive problem" in regulation using a principal-agent framework and the design of an incentive compatible regulatory system which encourages prudent behaviour and efficient financial intermediation. The discussion continues by assessing the nature of the trade-off between incentive and rule based regulation by analysing the interaction between regulatory and agency incentives. The paper concludes by considering the challenges in designing appropriate incentive mechanisms to regulate financial markets.
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Bibliographic InfoPaper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp170.
Date of creation: Jun 2000
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Web page: http://www.cbr.cam.ac.uk/
Incentives; Market Discipline; Financial Regulation;
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G29 - Financial Economics - - Financial Institutions and Services - - - Other
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-01-27 (All new papers)
- NEP-CFN-2001-01-27 (Corporate Finance)
- NEP-REG-2001-01-27 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Joe Peek & Eric S. Rosengren, 1996. "The use of capital ratios to trigger intervention in problem banks: too little, too late," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 49-58.
- Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October.
- Rahul Dhumale, 2000. "Capital Adequacy Standards: Are They Sufficient?," ESRC Centre for Business Research - Working Papers wp165, ESRC Centre for Business Research.
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