Supervisory Incentives in a Banking Union

Elena Carletti, Giovanni Dell'ariccia and Robert Marquez

No 2016/186, IMF Working Papers from International Monetary Fund

Abstract: We explore the behavior of supervisors when a centralized agency has full power over all decisions regarding banks, but relies on local supervisors to collect the information necessary to act. This institutional design entails a principal-agent problem between the central and local supervisors if their objective functions differ. Information collection may be inferior to that under fully independent local supervisors or under centralized information collection. And this may increase risk-taking by regulated banks. Yet, a “tougher” central supervisor may increase regulatory standards. Thus, the net effect of centralization on bank risk taking depends on the balance of these two effects.

Keywords: WP; optimal portfolio; Centralized bank supervision; bank risk taking; limited liability; portfolio quality; reaction function; portfolio choice; price bank risk; capitalized bank; investment portfolio; Distressed institutions; Portfolio investment; Bank supervision; Commercial banks; Investment banking; Europe; Global (search for similar items in EconPapers)
Pages: 50
Date: 2016-09-15
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Supervisory Incentives in a Banking Union (2021)
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