Flexible and Mandatory Banking Supervision

Alessandro De Chiara, Luca Livio (luca_livio@mckinsey.com) and Jorge Ponce

Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: Tighter regulation and more powerful supervision are being enacted after the global financial crisis. Although this trend may have positive welfare effects, it may also impose large social costs due to the strong reliance on supervisory information. We argue that offering banks a Flexible Supervision contract, designed to be chosen by those banks that will otherwise attempt to capture the supervisor, is a mechanism to implement the most efficient regulation under asymmetric information. The result that Flexible Supervision outperforms Mandatory Supervision remains robust to a series of extensions to our baseline model. Policy implications follow directly: Benevolent regulators should enact a Flexible Supervision regime for the less risky, more capitalized and transparent banks in addition to the traditional Mandatory Supervision regime.

Keywords: banking supervision; regulatory capture (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 41 p.
Date: 2016-03
New Economics Papers: this item is included in nep-cba
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Related works:
Journal Article: Flexible and mandatory banking supervision (2018)
Working Paper: Flexible and Mandatory Banking Supervision (2016)
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