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Endogenous bank regulation and supervision: Long term implications

Author

Listed:
  • Karakoyun, Oğuz Kaan
  • Karakaplan, Mustafa U.
  • Neyaptı, Bilin

Abstract

The role of bank regulation and supervision (RS) on financial stability and welfare has been subject to ongoing research, especially since the Great Recession. RS is expected to help eliminate the adverse selection and moral hazard problems that are abundant in financial transactions. In this paper, we present a general equilibrium model that is augmented by either a bank regulatory and supervisory agent who chooses the level of RS by maximizing bank profits, or by a macroprudential agent who minimizes non-performing loans (NPL). We compare the long-term outcomes of these scenarios and show that minimizing NPL is feasible for a larger and economically more viable range of parameter values than the alternatives. Moreover, for a comparable set of parameter combinations, the optimal choice of RS that minimizes NPL leads to both higher levels of steady state income and lower interest spreads as compared to RS that maximizes bank profits.

Suggested Citation

  • Karakoyun, Oğuz Kaan & Karakaplan, Mustafa U. & Neyaptı, Bilin, 2024. "Endogenous bank regulation and supervision: Long term implications," Journal of Financial Stability, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:finsta:v:70:y:2024:i:c:s1572308924000019
    DOI: 10.1016/j.jfs.2024.101216
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    More about this item

    Keywords

    Bank Regulation and Supervision; Macroprudential Agent; General Equilibrium Model; Non-Performing Loans;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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