Supervisory Incentives in a Banking Union
September 15, 2016
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Summary
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.
Subject: Balance of payments, Bank supervision, Banking, Commercial banks, Distressed institutions, Financial institutions, Financial regulation and supervision, Financial services, Investment banking, Portfolio investment
Keywords: bank risk taking, Bank supervision, capitalized bank, Centralized bank supervision, Commercial banks, Distressed institutions, Europe, Global, Investment banking, investment portfolio, limited liability, optimal portfolio, portfolio choice, Portfolio investment, portfolio quality, price bank risk, reaction function, WP
Pages:
50
Volume:
2016
DOI:
Issue:
186
Series:
Working Paper No. 2016/186
Stock No:
WPIEA2016186
ISBN:
9781475536751
ISSN:
1018-5941
