The role of prudential supervision in a regulated banking industry
This study considers the optimal regulation of a single bank that has private information on the intrinsic quality of its loan portfolio (adverse selection) and where the bank's choice of effort to improve this quality cannot be observed by the banking regulator (moral hazard). In designing optimal contracts the regulator faces a tradeoff between inducing proper incentives for efficient banking and costs of regulation in terms of leaving an informational rent for a high quality bank. As a consequence, the instability of the banking sector increases. To resolve the informational asymmetries the regulator may require the help of a supervising agency, allowing to impose penalties on a bank's management when caught shirking. However, since improving the accuracy of supervision is costly, even in the optimal monitoring scheme there generally exists a positive probability of bankruptcy. Hence, full information disclosure in the sense of improving the supervisor's accuracy to the fullest need not be optimal for the regulator.
|Date of creation:||1999|
|Date of revision:|
|Contact details of provider:|| Postal: Postbus 98, 1000 AB Amsterdam|
Web page: http://www.dnb.nl/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.:
- Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937.
- Giammarino, R.M. & Sappington, D.E.M., 1990.
"An Incentive Approach to Banking Regulation,"
367, California Davis - Institute of Governmental Affairs.
- Kofman, Fred & Lawarree, Jacques, 1993.
"Collusion in Hierarchical Agency,"
Econometric Society, vol. 61(3), pages 629-56, May.
- Kofman, F. & Lawarree, J., 1990. "Collusion in Hierarchical Agency," Working Papers 91-01, University of Washington, Department of Economics.
- Kofman, F. & Lawarree, J., 1990. "Collusion in Hierarchical Agency," Discussion Papers in Economics at the University of Washington 91-01, Department of Economics at the University of Washington.
- Eduardo Levy Yeyati & Tito Cordella, 1997.
"Public Disclosure and Bank Failures,"
IMF Working Papers
97/96, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:dnb:wormem:594. 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: (Rob Vet)
If references are entirely missing, you can add them using this form.