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Regulating A Model

Author

Listed:
  • Yaron Leitner
  • Bilge Yilmaz

Abstract

REVISED: 5/2018: We study a situation in which a regulator relies on models produced by banks in order to regulate them. A bank can generate more than one model and choose which models to reveal to the regulator. The regulator can find out the other models by monitoring the bank, but, in equilibrium, monitoring induces the bank to produce less information. We show that a high level of monitoring is desirable when the bank's private gain from producing more information is either sufficiently high or sufficiently low (e.g., when the bank has a very little or very large amount of debt). When public models are more precise, banks produce more information, but the regulator may end up monitoring more

Suggested Citation

  • Yaron Leitner & Bilge Yilmaz, 2016. "Regulating A Model," Working Papers 16-31, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:16-31
    DOI: 10.1016/j.jfineco.2018.08.010
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    References listed on IDEAS

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    More about this item

    Keywords

    model-based regulation; Bayesian persuasion; bank regulation; internal-risk models;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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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