Optimal Preventive Bank Supervision Combining Random Audits and Continuous Intervention

Mohamed Belhaj () and Nataliya Klimenko ()
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Nataliya Klimenko: Aix-Marseille Université, Greqam

No 1201, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Early regulator interventions into problem banks are one of the key suggestions of Basel II. 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: continuous regulator intervention and random audits. Random audit technologies differ as to quality and cost. Our design ensures good management without excessive supervision costs, through a gradual adjustment of supervision effort to the bank's financial health. We also consider preventive supervision in a setting where audits can be delegated to an independent audit agency, showing how to induce agency compliance with regulatory instructions in the least costly way.

Keywords: banking supervision; random audit; incentives; moral hazard; delegation. (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta and nep-rmg
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Optimal Preventive Bank Supervision: Combining Random Audits and Continuous Intervention (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:1201

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