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Title:Managerial Prudence under Banking Regulation PDF Logo
Authors:Buck, Florian
Issue Date:2010
Series/Report no.:Beiträge zur Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie - Session: Banking Regulation: Liquidity and Regulatory Capital A7-V3
Abstract:This article provides a theoretical framework to analyze the impact of banking regulation on the risk-taking behavior of banks by incorporatig the incentives of three risk-neutral agents - the welfaristic regulator, the shareholder and the manager. While shareholders are assumed to maximize the discounted flow of bank profits, bank managers maximize expected income choosing from a menu of portfolios with different risk-return profiles. We show under which conditions capital requirements intensify the agency conflict between shareholders and bank managers if complete contracts are impossible. As a result, a government interested in alleviating this divergence will incorporate capital requirements to curb risk-appetite only in those cases in which managerial myopia and the probability of default in the banking-sector are not substantial. Moreover, our model suggests that direct regulation of a manager's bonus system is a substitute for any form of capital requirements.
Subjects:Subprime Crisis
Banking regulation
JEL:G28
G38
G30
Document Type:Conference Paper
Appears in Collections:Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie

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