An Incentive Based Regulatory System: A Bridge Too Far
This paper argues that the operation of the financial sector as a whole will not be as effective if market discipline is relied upon as the only tool of financial regulation. Before enacting any incentive mechanisms, there must be adequate built-in measures to prevent the exploitation of information asymmetries as well as greater harmonisation and co-ordination of regulatory standards between countries. The paper considers the "incentive problem" in regulation using a principal-agent framework and the design of an incentive compatible regulatory system which encourages prudent behaviour and efficient financial intermediation. The discussion continues by assessing the nature of the trade-off between incentive and rule based regulation by analysing the interaction between regulatory and agency incentives. The paper concludes by considering the challenges in designing appropriate incentive mechanisms to regulate financial markets.
|Date of creation:||Jun 2000|
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References listed on IDEAS
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- João Santos, 1998.
"Commercial Banks in the Securities Business: A Review,"
Journal of Financial Services Research,
Springer, vol. 14(1), pages 35-60, July.
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- Rahul Dhumale, 2000. "Capital Adequacy Standards: Are They Sufficient?," ESRC Centre for Business Research - Working Papers wp165, ESRC Centre for Business Research.
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- Joe Peek & Eric S. Rosengren, 1996. "The use of capital ratios to trigger intervention in problem banks: too little, too late," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 49-58.
- Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October.
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