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Regulation and Bankers’ Incentives

Fabiana Gómez () and Jorge Ponce
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Fabiana Gómez: University of Bristol
Jorge Ponce: Banco Central del Uruguay

Journal of Financial Services Research, 2019, vol. 56, issue 3, 209-227

Abstract: Abstract We study the effects of minimum capital requirements, capital buffers, liquidity regulation and loan loss provisions on the incentives of bankers to exert effort and take excessive risk. These regulations impact differently the behavior of bankers. Capital regulation, liquidity requirements and traditional loan loss provisions for expected losses provide adequate incentives to bankers. Capital requirements are the most powerful instrument. Counter-cyclical (so-called dynamic) loan loss provisions may provide bankers with incentives to gamble. The results help informing the ongoing debate about the harmonization of banking regulation and the implementation of Basel III.

Keywords: Banking regulation; Minimum capital requirement; Capital buffer; Liquidity requirement; (Counter-cyclical) loan loss provision; Bankers’ incentives; Effort; Risk (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10693-018-0303-z

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