Optimal Prudential Regulation of Banks and the Political Economy of Supervision
Thierry Tressel () and
Thierry Verdier ()
No 9871, CEPR Discussion Papers from C.E.P.R. Discussion Papers
We consider a moral hazard economy with the potential for collusion between bankers and borrowers to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates or a low return on investment may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium is not optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the state of the macro-financial cycle, and that,in presence of production externalities, the capital ratio should be complemented by a constraint on asset allocation. We study the political economy of supervision. We show that the political process tends to exacerbate excessive risk taking and credit cycles by weakening the quality of banking supervision when instead it should be strengthened.
Keywords: banking regulation; political economy; regulatory forbearance (search for similar items in EconPapers)
JEL-codes: D8 E44 G2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta, nep-mac, nep-pol and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:9871
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=9871
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().