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- W2184045707 abstract "How banks should be regulated in periods of intense financial innovation? Is traditional risk-weighted capital regulation sufficient or should we consider regulatory interference in the form of restrictions to the scope of bank’s activities? To enforce regulations should we rely on discretion or should we impose rules that constrain the regulators? These questions are motivated both by the severe governance problems that arise because of the power of bankers and by the risk of supervisory forbearance. These questions are particularly important in periods of changing economic environment and financial innovations which make managerial performance more difficult to evaluate. To answer them, we develop a model where a bank’s investment decision is non-contractible, with the option to limit eff ort at the cost of lowering the probability of success. We show, first, that a regulation that restricts the scope of bank investments is of interest only when the bank cannot commit to project choice and it is exposed to effort moral hazard. Second, we show how capital regulation may erode a bank’s rents and deprive it of a sufficient incentive to monitor its project. Finally we show under what conditions" @default.
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- W2184045707 date "2009-01-01" @default.
- W2184045707 modified "2023-09-27" @default.
- W2184045707 title "Rules vs. discretion in times of financial innovation" @default.
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