Basel II: A Contracting Perspective

Kane, Edward J.

doi:10.1007/s10693-007-0020-5

Cited by 28 publications

(9 citation statements)

References 19 publications

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“…Barring such changes, countries that have expressed plans to adhere to the Basel II framework may wish to rethink their positions. At a minimum, as suggested by Kane (2006), they may wish to undertake further negotiations aimed at strengthening the market discipline pillar and re-orienting the supervisory-process pillar before finalizing their adoptions.…”

Section: Discussionmentioning

confidence: 99%

Market Discipline and Supervisory Discretion in Banking: Reinforcing or Conflicting Pillars of Basel II?

VanHoose

2007

SSRN Journal

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This paper examines the market-discipline and supervisory-process "pillars" of the Basel II framework. It reviews the key features of these Basel II pillars and discusses and evaluates associated conceptual issues in relation to theoretical predictions and empirical findings in the academic literature. One conclusion is that while the market-discipline pillar is for many nations a potentially useful first step toward improving bank information disclosure, this pillar of Basel II falls short of promoting effective market monitoring by private investors or encouraging the utilization of market signals by both investors and bank regulators. A second conclusion is that the Basel II supervisory-process pillar is completely misguided in its reliance on regulatory discretion, so that implementation of this pillar could potentially have counterproductive safety-and-soundness impacts. Thus, the market-discipline pillar does not go far enough in the direction suggested by academic research, and the supervisory-process pillar actually goes in the wrong direction.

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Section: Discussionmentioning

confidence: 99%

Market Discipline and Supervisory Discretion in Banking: Reinforcing or Conflicting Pillars of Basel II?

VanHoose

2007

SSRN Journal

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“…Regulation and supervision was not the only culprit, but regulation had a key role in widespread distortions of incentives, including incentives of rating organizations to conduct appropriate due diligence. This was compounded by incentive distortions (moral hazard) associated with too-big-to-fail policies (e.g., Kane 2007, Caprio et al 2009, Ötker-Robe and others 2011, adverse selection associated with the rules for assessing the credit worthiness of borrowers, and the principle/agent problems within financial institutions, related to the nature of ownership and the structure of executive compensation that favored risk taking and higher short term returns to the longer term detriment of shareholders.…”

Section: Case Study: Distorted Incentives In the Run-up To The Us Subprime Mortgage Crisismentioning

confidence: 99%

Incentive Audits: A New Approach to Financial Regulation

Čihák¹,

Demirgüç-Kunt²,

Johnston³

2013

Policy Research Working Papers

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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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“…Some regulators lack independence, and even regulators that are legally independent find it often difficult to withstand pressures from the industry. 3 The ‘revolving door’ of staff between the regulatory authorities and the industry — unavoidable to some extent, because industry background and familiarity with the instruments and activities help in understanding risks — resulted in the perception of conflicts of interest for some individual supervisors (Kane, 2007).…”

Section: Policy Implications and The Importance Of Incentivesmentioning

confidence: 99%

Financial Structure and Incentives

Čihák¹,

Demirgüç-Kunt²

2012

Natl. Inst. econ. rev.

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The article connects two streams of recent research on the financial sector. The first is the regulation literature, which emphasises the central role of incentives in the financial sector. It points out that the challenge of financial sector regulation, highlighted by the global financial crisis, is to align private incentives with public interest without taxing or subsidising private risk-taking. The second stream of research relates to financial structures and examines the mix of financial institutions and financial markets in an economy. It finds that, as economies develop, services provided by financial markets become comparatively more important than those provided by banks. The article brings these two streams together, pointing out that — as financial systems develop from bank-based to market-based — a traditional regulatory approach that relies on banking ratios becomes less effective. There is thus a greater need for properly monitoring and addressing the underlying incentive weaknesses in market-based systems.

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Basel II: A Contracting Perspective

Abstract: Basel II, sequential contracting, financial safety nets, financial regulation, incomplete contracts,

Cited by 28 publications

References 19 publications

Market Discipline and Supervisory Discretion in Banking: Reinforcing or Conflicting Pillars of Basel II?

Market Discipline and Supervisory Discretion in Banking: Reinforcing or Conflicting Pillars of Basel II?

Incentive Audits: A New Approach to Financial Regulation

Financial Structure and Incentives

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