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Flexible and Mandatory Banking Supervision

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  • Alessandro De Chiara
  • Luca Livio
  • Jorge Ponce

Abstract

Tighter regulation and more powerful supervision are being enacted after the global financial crisis. Although this trend may have positive welfare effects, it may also impose large social costs due to the strong reliance on supervisory information. We argue that offering banks a Flexible Supervision contract, designed to be chosen by those banks that will otherwise attempt to capture the supervisor, is a mechanism to implement the most efficient regulation under asymmetric information. The result that Flexible Supervision outperforms Mandatory Supervision remains robust to a series of extensions to our baseline model. Policy implications follow directly: Benevolent regulators should enact a Flexible Supervision regime for the less risky, more capitalized and transparent banks in addition to the traditional Mandatory Supervision regime.

Suggested Citation

  • Alessandro De Chiara & Luca Livio & Jorge Ponce, 2016. "Flexible and Mandatory Banking Supervision," Working Papers ECARES ECARES 2016-09, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/228089
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    3. José Américo Pereira Antunes, 2021. "To supervise or to self-supervise: a machine learning based comparison on credit supervision," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-21, December.

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    More about this item

    Keywords

    banking supervision; regulatory capture;

    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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