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Flexible and mandatory banking supervision

Author

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  • De Chiara, Alessandro
  • Livio, Luca
  • Ponce, Jorge

Abstract

The implementation of tighter regulation and more powerful supervision may impose large social costs due to the strong reliance on supervisory information that requires direct assessment by a supervisor (i.e. Mandatory Supervision). We show that by introducing a Flexible Supervision contract, which is designed to be chosen by those banks that have incentives to capture the supervisor and allows them to bypass Mandatory Supervision, the most efficient regulation under asymmetric information may be implemented. Benevolent regulators should introduce Flexible Supervision regimes for the less risky, more capitalized and transparent banks in addition to the traditional Mandatory Supervision regime.

Suggested Citation

  • De Chiara, Alessandro & Livio, Luca & Ponce, Jorge, 2018. "Flexible and mandatory banking supervision," Journal of Financial Stability, Elsevier, vol. 34(C), pages 86-104.
  • Handle: RePEc:eee:finsta:v:34:y:2018:i:c:p:86-104
    DOI: 10.1016/j.jfs.2017.12.002
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    More about this item

    Keywords

    Banking supervision; Regulatory capture;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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