Optimal Preventive Bank Supervision Combining Random Audits and Continuous Intervention
Early regulator interventions into problem banks are one of the key suggestions of Basel II. However, no guidance is given on their design. To fill this gap, we outline an incentive-based preventive supervision strategy that eliminates bad asset management in banks. Two supervision techniques are combined: continuous regulator intervention and random audits. Random audit technologies differ as to quality and cost. Our design ensures good management without excessive supervision costs, through a gradual adjustment of supervision effort to the bank's financial health. We also consider preventive supervision in a setting where audits can be delegated to an independent audit agency, showing how to induce agency compliance with regulatory instructions in the least costly way.
|Date of creation:||Jan 2012|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.amse-aixmarseille.fr/en|
More information through EDIRC
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.:
- Dangl, Thomas & Lehar, Alfred, 2004. "Value-at-risk vs. building block regulation in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 96-131, April.
- Strausz, R.G., 1995.
"Delegation of Monitoring in a Principal-Agent Relationship,"
1995-60, Tilburg University, Center for Economic Research.
- Roland Strausz, 1997. "Delegation of Monitoring in a Principal-Agent Relationship," Review of Economic Studies, Oxford University Press, vol. 64(3), pages 337-357.
- Yuliy Sannikov, 2008. "A Continuous-Time Version of the Principal-Agent Problem," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 957-984.
- Décamps, Jean-Paul & Rochet, Jean-Charles & Roger, Benoît, 2003.
"The Three Pillars of Basel II, Optimizing the Mix,"
IDEI Working Papers
179, Institut d'Économie Industrielle (IDEI), Toulouse.
- Sudipto Bhattacharya & Manfred Plank & Josef Zechner & Gunter Strobl, 2000.
"Bank Capital Regulation With Random Audits,"
FMG Discussion Papers
dp354, Financial Markets Group.
- Henri Pagès & João A. C. Santos, 2003.
"Optimal supervisory policies and depositor-preference laws,"
BIS Working Papers
131, Bank for International Settlements.
- Pagès, H. & Santos, J., 2002. "Optimal Supervisory Policies and Depositor-Preferences Laws," Working papers 91, Banque de France.
- Fries,S. & Mella-Barral,P. & Perraudin,W.R.M., 1995.
"Optimal Bank Reorganisation and the Fair Pricing of Deposit Garantees,"
Cambridge Working Papers in Economics
9417, Faculty of Economics, University of Cambridge.
- Fries, Steven & Mella-Barral, Pierre & Perraudin, William, 1997. "Optimal bank reorganization and the fair pricing of deposit guarantees," Journal of Banking & Finance, Elsevier, vol. 21(4), pages 441-468, April.
- Abel Elizalde, 2007. "From Basel I To Basel Ii: An Analysis Of The Three Pillars," Working Papers wp2007_0704, CEMFI.
- Cvitanic Jaksa & Wan Xuhu & Zhang Jianfeng, 2008. "Principal-Agent Problems with Exit Options," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-43, October.
- Merton, Robert C., 1977.
"On the cost of deposit insurance when there are surveillance costs,"
903-77., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1978. "On the Cost of Deposit Insurance When There Are Surveillance Costs," The Journal of Business, University of Chicago Press, vol. 51(3), pages 439-52, July.
- Holmstrom, Bengt & Milgrom, Paul, 1987.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Econometric Society, vol. 55(2), pages 303-28, March.
- Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
- Jean-Charles Rochet, 2004. "Rebalancing the three pillars of Basel II," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 7-21.
- Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
- Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
- Thomas Barnebeck Andersen & Thomas Harr, 2008. "Franchise Values, Regulatory Monitoring, and Capital Requirements in Optimal Bank Regulation," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(1), pages 81-101, January.
- Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
- Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
When requesting a correction, please mention this item's handle: RePEc:aim:wpaimx:1201. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yves Doazan)
If references are entirely missing, you can add them using this form.