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Supervisory Incentives in a Banking Union
Author:
Elena Carletti null

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Mr. Giovanni Dell'Ariccia
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Mr. Robert Marquez null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 186
Language:
English
Publication Date:
15 Sep 2016
DOI:
https://doi.org/10.5089/9781475536751.001
ISBN:
9781475536751
ISSN:
1018-5941
Pages:
50
Keywords:
WP; optimal portfolio; Centralized bank supervision; bank risk taking; limited liability; portfolio quality; reaction function; portfolio choice; price bank risk; capitalized bank; investment portfolio; Distressed institutions; Portfolio investment; Bank supervision; Commercial banks; Investment banking; Europe; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We explore the behavior of supervisors when a centralized agency has full power over all decisions regarding banks, but relies on local supervisors to collect the information necessary to act. This institutional design entails a principal-agent problem between the central and local supervisors if their objective functions differ. Information collection may be inferior to that under fully independent local supervisors or under centralized information collection. And this may increase risk-taking by regulated banks. Yet, a “tougher” central supervisor may increase regulatory standards. Thus, the net effect of centralization on bank risk taking depends on the balance of these two effects.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund