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Incentives for Effective Risk Management

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Author Info

  • J�n Dan�elsson

    (London School of Economics)

  • Bj�rn N. Jorgensen

    (Harvard Business School)

  • Casper G. de Vries

    ()
    (Erasmus University Rotterdam, and NIAS)

Abstract

Under the new Capital Accord, banks choose between two different types of risk management systems, the standard or the internal rating based approach. The paper considers how a bank's preference for a risk management system is affected by the presence of supervision by bank regulators. The model uses a principal–agent setting between a bank's owner and its risk management. The main conclusion is that previously unregulated institutions can be expected to switch to the lower quality standard approach subsequent to becoming regulated, i.e., the presence of regulation may induce a bank to decrease the quality of its risk management system. Published in Journal of Banking and Finance (2002) 26, 1407-25.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-094/2.

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Date of creation: 09 Oct 2001
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Handle: RePEc:dgr:uvatin:20010094

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Web page: http://www.tinbergen.nl

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Keywords: Risk management systems; Regulation; Value-at-Risk; Basel-II;

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  1. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  2. Merton, Robert C., 1977. "On the cost of deposit insurance when there are surveillance costs," Working papers 903-77., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Hughes, John S., 1982. "Agency Theory and Stochastic Dominance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(03), pages 341-361, September.
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Cited by:
  1. Hałaj, Grzegorz & Kok, Christoffer, 2014. "Modeling emergence of the interbank networks," Working Paper Series 1646, European Central Bank.
  2. Keppo, Jussi & Kofman, Leonard & Meng, Xu, 2010. "Unintended consequences of the market risk requirement in banking regulation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2192-2214, October.
  3. Frésard, Laurent & Pérignon, Christophe & Wilhelmsson, Anders, 2011. "The pernicious effects of contaminated data in risk management," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2569-2583, October.
  4. Norvald Instefjord & Kouji Sasaki, 2007. "Proprietary trading losses in banks: do banks invest sufficiently in control?," Annals of Finance, Springer, vol. 3(3), pages 329-350, July.
  5. Godbillon-Camus, Brigitte & Godlewski, Christophe, 2005. "Credit risk management in banks: Hard information, soft Information and manipulation," MPRA Paper 1873, University Library of Munich, Germany.
  6. Szego, Giorgio, 2002. "Measures of risk," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1253-1272, July.
  7. Pérignon, Christophe & Smith, Daniel R., 2010. "The level and quality of Value-at-Risk disclosure by commercial banks," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 362-377, February.

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