Regulation and Bankers' Incentives

Fabiana Gómez and Jorge Ponce
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Fabiana Gómez: University of Bristol

No 2015005, Documentos de trabajo from Banco Central del Uruguay

Abstract: We formally compare the effects of minimum capital requirements, capital buffers, liquidity requirements and loan loss provisions on the incentives of bankers to exert effort and take excessive risk. We find that these regulations impact differently the behavior of bankers. In the case of investment banks, the application of capital buffers and liquidity requirements makes it more difficult to achieve the first best solution. In the case of commercial banks, capital buffers, reserve requirements and traditional loan loss provisions for expected losses provide adequate incentives to bank managers, although the capital buffer is the most powerful instrument. Counter-cyclical (so-called dynamic) loan loss provisions may provide bank managers with incentives to gamble. The results inform policy makers in 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; (countercyclical) loan loss provision; commercial banks; investment banks; bankers' incentives; effort; risk; Regulación bancaria; requerimiento mínimo de capital; colchones de capital; requerimientos de liquidez; provisiones (contracíclicas); bancos comerciales; bancos de inversión; incentivos del banquero; esfuerzo; riesgo (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-cba, nep-net and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Regulation and Bankers’ Incentives (2019)
Working Paper: Regulation and Bankers’ Incentives (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bku:doctra:2015005

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