Regulatory Practices and the Impossibility to Extract Truthful Risk Information

Patrick Leoni ()

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: We consider a regulator providing deposit insurance to a bank with private information about its investment portfolio. Following current regulatory practices, we assume that the regulator does not commit to audit and sanction after any risk report from the bank. We show that, in absence of commitment, the socially optimal contract leads a high-risk bank to misreport its risk with positive probability in most cases. We also isolate cases when truthful risk report is optimal. We thus establish that extraction of truthful risk information is not socially optimal in most cases given current regulatory practices.

Keywords: Banking Regulation; Partial Commitment; Asymmetric Information; Adverse Selectio (search for similar items in EconPapers)
JEL-codes: G28 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2006
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:may:mayecw:n1680906

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