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Politically Robust Financial Regulation

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  • Mr. Itai Agur

Abstract

The deferred recognition of COVID-induced losses at banks in many countries has reignited the debate on regulatory forbearance. This paper presents a model where the public's own political pressure drives regulatory policy astray, because the public is poorly informed. Using probabilistic game stages, the model parameterizes how time consistent policy is. The interaction between political motivations and time consistency is novel and complex: increased policy credibility can entice the politically-motivated regulator to act in the public's best interest, or instead repel it from doing so. Considering several regulatory instruments, the paper probes the nexus of political pressure, perverse bank incentives and time inconsistent policy.

Suggested Citation

  • Mr. Itai Agur, 2021. "Politically Robust Financial Regulation," IMF Working Papers 2021/001, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2021/001
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    Keywords

    Time inconsistency; Political economy; Financial stability; Bank regulation.; WP; risk profile; bank risk; bank insolvency; bank owner;
    All these keywords.

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