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Optimal preventive bank supervision


Belhaj, Mohamed; Klimenko, Nataliya (2012). Optimal preventive bank supervision. AMSE Working Papers 1201, University of Zurich.

Abstract

Early regulator interventions into problem banks is one of the key suggestions of Basel Committee on Banking Supervision. However, no guidance is given on their design. To fill this gap, we outline an incentive-based preventive supervision strategy that eliminates bad asset management in banks. Two supervision techniques are combined: temporary regulatory administration and random audits. Our design ensures good management without excessive supervision costs, through a gradual adjustment of supervision efforts to the bank's financial health. We also allow random audits to be delegated to an independent audit agency and show how to induce agency compliance with regulatory instructions in the least costly way.

Abstract

Early regulator interventions into problem banks is one of the key suggestions of Basel Committee on Banking Supervision. However, no guidance is given on their design. To fill this gap, we outline an incentive-based preventive supervision strategy that eliminates bad asset management in banks. Two supervision techniques are combined: temporary regulatory administration and random audits. Our design ensures good management without excessive supervision costs, through a gradual adjustment of supervision efforts to the bank's financial health. We also allow random audits to be delegated to an independent audit agency and show how to induce agency compliance with regulatory instructions in the least costly way.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2012
Deposited On:05 Mar 2015 11:19
Last Modified:08 Dec 2017 11:51
Series Name:AMSE Working Papers
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.amse-aixmarseille.fr/sites/default/files/_dt/2012/wp_2012_-_nr_01.pdf
Related URLs:http://econpapers.repec.org/paper/aimwpaimx/1201.htm
http://EconPapers.repec.org/RePEc:aim:wpaimx:1201
Other Identification Number:merlin-id:9351

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