BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 2/2000:
Bank Regulation, Compliance and Enforcement
Rupinder Singh ()
Abstract: A model is presented where the question of bank regulation
is developed under a principal-agent scenario in a regime where the
regulator has limited resources and banks may have an incentive to act
ultra virus the regulatory standards. If banks are subject to random audit,
then compliance is achieved through a system of fines determined according
to the extent of non-compliance. The model shows that the choice of
internal monitoring of risk is driven by each bank’s choice of the wage
contract for its compliance officer who works for the ban for a wage. The
officer’s incentive for effective monitoring is heightened by the threat of
an internal fine from the bank for any contravention of regulations.
Moreover, either a fine on the bank or a fine on the compliance officer
alone is sufficient to ensure that efficiency is achieved. The model is
useful for the bank regulator in a market economy and in transition
economies, where the effective constraint on regulatory capacity is
addressed using market-based incentives to ensure prudent regulation and
effective supervision, and thereby limit the danger of bank failure and
contagion.
Keywords: banking; regulation; supervision; enforcement; transition economies; (follow links to similar papers)
JEL-Codes: E50; G00; P20; P30; (follow links to similar papers)
27 pages, February 15, 2000
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