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Enhancing Bank Transparency: What Role for the Supervision Authority?

Author

Listed:
  • Francesco Giuli

    () (University of Rome La Sapienza, Department of Public Economics, Italy)

  • Marco Manzo

    () (Ministry of Economics, Italy and OECD)

Abstract

We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bond risks; a unique benevolent public authority aims at maximising investors welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on a firms true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. By establishing the necessary conditions that allow optimal sanctions to produce the first best equilibrium, we show that the core problem of adverse selection in the corporate bond market does not lie so much in the benevolence of the delegated monitoring system, but rather in the possibility of affecting and sanctioning a firms behaviour.

Suggested Citation

  • Francesco Giuli & Marco Manzo, 2009. "Enhancing Bank Transparency: What Role for the Supervision Authority?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(4), pages 1-58, December.
  • Handle: RePEc:voj:journl:v:56:y:2009:i:4:p:1-58
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    References listed on IDEAS

    as
    1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, February.
    2. Kirstein, Roland, 2002. "The new Basle Accord, internal ratings, and the incentives of banks," International Review of Law and Economics, Elsevier, vol. 21(4), pages 393-412, May.
    3. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
    4. Mehmet Bac, 2001. "Corruption, Connections and Transparency: Does a Better Screen Imply a Better Scene?," Public Choice, Springer, vol. 107(1), pages 87-96, April.
    5. Bester, Helmut & Strausz, Roland, 2007. "Contracting with imperfect commitment and noisy communication," Journal of Economic Theory, Elsevier, pages 236-259.
    6. Strausz, Roland, 2005. "Honest certification and the threat of capture," International Journal of Industrial Organization, Elsevier, pages 45-62.
    7. Eloïc Peyrache & Lucía Quesada, 2011. "Intermediaries, Credibility and Incentives to Collude," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1099-1133, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Corporate bond; Incentives; Collusion; Regulation;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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