Incentives for Effective Risk Management

Jon Danielsson, Bjørn Jørgensen and Casper de Vries

No 01-094/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Under the new Capital Accord, banks choose between two different types of risk management systems, the standard or the internal rating based approach. The paper considers how a bank's preference for a risk management system is affected by the presence of supervision by bank regulators. The model uses a principal–agent setting between a bank's owner and its risk management. The main conclusion is that previously unregulated institutions can be expected to switch to the lower quality standard approach subsequent to becoming regulated, i.e., the presence of regulation may induce a bank to decrease the quality of its risk management system.

Published in Journal of Banking and Finance (2002) 26, 1407-25.

Keywords: Risk management systems; Regulation; Value-at-Risk; Basel-II (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2001-10-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20010094

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