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Optimal supervisory policies and depositor-preference laws

Author

Listed:
  • Henri Pagès

    (Fondation Banque de France pour la Recherche)

  • João A. C. Santos

    (Federal Reserve Bank of New York)

Abstract

When supervisors have imperfect information about the soundness of banks, they may be unaware of insolvency problems that develop in the interval between on-site examinations. Supervising banks more often will alleviate this problem but will increase the costs of supervision. This paper analyzes the trade-offs that supervisors face between the cost of supervision and their need to monitor banks effectively. We first characterize the optimal supervisory policy, in terms of the time between examinations and the closure rule at examinations, and compare it with the policy of an independent supervisor. We then show that making this supervisor accountable for deposit insurance losses in general reduces the excessive forbearance of the independent supervisor and may also improve on the time between examinations. Finally, we extend our analysis to the impact of depositor-preference laws on supervisors' monitoring incentives and show that these laws may lead to conflicting effects on the time between examinations and closure policy vis-à-vis the social optimum.

Suggested Citation

  • Henri Pagès & João A. C. Santos, 2003. "Optimal supervisory policies and depositor-preference laws," BIS Working Papers 131, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:131
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mohamed Belhaj & Nataliya Klimenko, 2012. "Optimal Preventive Bank Supervision Combining Random Audits and Continuous Intervention," AMSE Working Papers 1201, Aix-Marseille School of Economics, Marseille, France.
    2. Klüh, Ulrich, 2005. "Safety Net Design and Systemic Risk: New Empirical Evidence," Discussion Papers in Economics 662, University of Munich, Department of Economics.
    3. Loriana Pelizzon & Stephen Schaefer, 2007. "Pillar 1 versus Pillar 2 under Risk Management," NBER Chapters,in: The Risks of Financial Institutions, pages 377-416 National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Deposit Insurance; Depositor Preference; Supervision;

    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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