This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

State-contingent bank regulation with unobserved actions and unobserved characteristics

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Edward Simpson Prescott

Additional information is available for the following registered author(s):

Abstract

This paper studies bank regulation in the presence of deposit insurance, where banks have private information on their own ability and their investment strategy. Banks choose the mean and variance of their portfolio return. Regulators wish to control banks' risk choice, even though all agents are risk neutral and there are no deadweight costs of bank failure, because high risk adversely affects banks' ex ante incentives along other dimensions. Regulatory tools studied are capital requirements and return-contingent fines. Regulators can seek to separate bank types by offering a menu of contracts. We use numerical methods to study the properties of the model with two different bank types. Without fines, capital requirements only have limited ability to separate bank types. When fines are added, separation is much easier. Fine schedules and capital requirements are tailored to bank type. Low quality banks are fined when they produce high returns in order to control risk-taking behavior. High quality banks face fines on lower returns to prevent low-type banks from pretending they are high quality. Combining state-contingent fines with capital regulation significantly improves upon pure capital regulation.

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 file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.richmondfed.org/publications/economic_research/working_papers/pdfs/wp04-2.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 04-02.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: 2004
Date of revision:
Handle: RePEc:fip:fedrwp:04-02

Contact details of provider:
Web page: http://www.richmondfed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.richmondfed.org/publications/

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Banks and banking

Other versions of this item:

This paper has been announced in the following NEP Reports: References listed on IDEAS
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.:
  1. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June. [Downloadable!] (restricted)
  2. Giammarino, Ronald M & Lewis, Tracy R & Sappington, David E M, 1993. " An Incentive Approach to Banking Regulation," Journal of Finance, American Finance Association, vol. 48(4), pages 1523-42, September. [Downloadable!] (restricted)
    Other versions:
  3. Palomino, Frederic & Prat, Andrea, 2003. " Risk Taking and Optimal Contracts for Money Managers," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 113-37, Spring.
  4. Rochet, Jean-Charles, 1999. "Solvency regulations and the management of banking risks," European Economic Review, Elsevier, vol. 43(4-6), pages 981-990, April. [Downloadable!] (restricted)
  5. John H. Boyd & Chun Chang & Bruce D. Smith, 1998. "Moral hazard under commercial and universal banking," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-471.
    Other versions:
  6. Boyd, John H. & Chang, Chun & Smith, Bruce D., 2002. "Deposit insurance: a reconsideration," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1235-1260, September. [Downloadable!] (restricted)
    Other versions:
  7. John Christensen, 1981. "Communication in Agencies," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 661-674, Autumn. [Downloadable!] (restricted)
  8. Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April. [Downloadable!] (restricted)
  9. Marshall, David A. & Prescott, Edward Simpson, 2001. "Bank capital regulation with and without state-contingent penalties," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 139-184, June. [Downloadable!] (restricted)
    Other versions:
  10. Dominique M. Demougin, 1989. "A Renegotiation-Proof Mechanism for a Principal-Agent Model with Moral Hazard and Adverse Selection," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 256-267, Summer. [Downloadable!] (restricted)
  11. Paul H. Kupiec & James M. O'Brien, 1995. "Recent developments in bank capital regulation of market risks," Finance and Economics Discussion Series 95-51, Board of Governors of the Federal Reserve System (U.S.).
  12. Paul H. Kupiec & James M. O'Brien, 1995. "A pre-commitment approach to capital requirements for market risk," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 552-562.
  13. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June. [Downloadable!] (restricted)
    Other versions:
  14. Paul H. Kupiec & James M. O'Brien, 1995. "A pre-commitment approach to capital requirements for market risk," Finance and Economics Discussion Series 95-36, Board of Governors of the Federal Reserve System (U.S.).
  15. Stephen F. LeRoy, 1990. "Mutual deposit insurance," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jun 8. [Downloadable!]
  16. Tim S. Campbell & Yuk-Shee Chan & Anthony M. Marino, 1990. "An incentive based theory of bank regulation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    Other versions:
  17. Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
  18. Besanko, David & Kanatas, George, 1996. "The Regulation of Bank Capital: Do Capital Standards Promote Bank Safety?," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 160-183, April. [Downloadable!] (restricted)
  19. Nagarajan, S. & Sealey, C. W., 1998. "State-contingent regulatory mechanisms and fairly priced deposit insurance," Journal of Banking & Finance, Elsevier, vol. 22(9), pages 1139-1156, September. [Downloadable!] (restricted)
  20. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January. [Downloadable!] (restricted)
  21. Edward S. Prescott, 1999. "A primer on moral-hazard models," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 47-78. [Downloadable!]
  22. Berger, Allen N, 1995. "The Relationship between Capital and Earnings in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 432-56, May. [Downloadable!] (restricted)
    Other versions:
  23. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)

  1. Abel Elizalde & Rafael Repullo, 2004. "Economic And Regulatory Capital. What Is The Difference?," Working Papers wp2004_0422, CEMFI. [Downloadable!]
    Other versions:
  2. Javier Díaz-Giménez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms In The U.S.: A Boon For The Income Poor," Working Papers wp2006_0611, CEMFI. [Downloadable!]
    Other versions:
  3. Jose Ceron & Javier Suarez, 2006. "Hot And Cold Housing Markets: International Evidence," Working Papers wp2006_0603, CEMFI. [Downloadable!]
    Other versions:
  4. Rangan Gupta, 2004. "Costly State Monitoring and Reserve Requirements," Working papers 2004-33, University of Connecticut, Department of Economics, revised Jul 2005. [Downloadable!]
  5. Aleix Calveras & Juan-José Ganuza & Gerard Llobet, 2005. "Regulation And Opportunism: How Much Activism Do We Need?," Working Papers wp2005_0508, CEMFI. [Downloadable!]
    Other versions:
  6. Beatriz Dominguez & Juan-José Ganuza & Gerard Llobet, 2006. "R&D In The Pharmaceutical Industry: A World Of Small Innovation," Working Papers wp2006_0601, CEMFI. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? RePEc data is maintained by each archive holder on its own website. Nothing is held centrally.

This page was last updated on 2008-7-7.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.