A Behavioral Approach to Financial Supervision, Regulation, and Central Banking
IMF Working Papers, August 2, 2018
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- A Behavioral Approach to Financial Supervision, Regulation, and Central Banking
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Bibliographic details
- Authors: Ashraf Khan
- Published: August 2, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484372289.001
Overview
- This paper describes how behavioral elements are relevant to financial supervision, regulation, and central banking.
- It stresses that financial supervisors, regulators, and central banks have not yet realized the full potential that these behavioral elements hold.
- To realize this potential, the paper argues that authorities need to devise a behavioral approach that includes aspects relating to individual and group behavior.
- The paper provides case examples of experiments with such an approach, including behavioral supervision.
- It highlights areas for further research.
Key themes and conceptual focus
- Behavioral effects of norms:
- Social norms
- Legal norms
- Market norms
- Behavior of others:
- Internalization
- Identification
- Compliance
- Psychological biases:
- The paper identifies psychological biases as a central element affecting decisions in financial supervision, regulation, and central banking.
Principal findings (as presented)
- Financial supervisors, regulators, and central banks have not yet realized the full potential of behavioral elements.
- A behavioral approach should explicitly address individual and group behavior in supervisory and regulatory design.
- Experiments and case examples suggest behavioral supervision is a viable complement to traditional tools.
Case examples and experiments
- The paper provides case examples of experiments implementing a behavioral approach, including behavioral supervision.
- These case examples are used to illustrate practical applications of the conceptual elements (norms, behavior of others, psychological biases).
Policy implications and recommendations
- Devise a behavioral approach to supervision, regulation, and central banking that:
- Incorporates behavioral effects of social, legal, and market norms.
- Accounts for how individuals internalize, identify with, and comply with the behavior of others.
- Integrates understanding of psychological biases at individual and group levels.
- Use experiments and behavioral supervision pilots to test design features and effectiveness before wider implementation.
Areas for further research
- The paper highlights multiple areas for further research related to:
- Operationalizing behavioral approaches in supervision and regulation.
- Measuring the impact of norms and psychological biases on financial-sector behavior.
- Designing experiments that evaluate behavioral interventions in supervisory settings.