The prudential regulation of banks

Author(s)

Bibliographic Information

The prudential regulation of banks

Mathias Dewatripont and Jean Tirole

（The Walras-Pareto lectures, 1）

MIT Press, c1994

  • : pbk

Other Title

La réglementation prudentielle des banques

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Note

Originally published: Lausanne, Switzerland : Éditions Payot, 1993

Includes bibliographical references (p. [243]-255) and index

Description and Table of Contents

Volume

ISBN 9780262041461

Description

This text applies modern economic theory to prudential regulation of financial intermediaries. The authors tackle the key problem of providing the right incentives to management in banks by looking at how external intervention by claimholders (holders of equity or debt) affects managerial incentives and how that intervention might ideally be implemented. The primary focus is the regulation of commercial banks and S&Ls, but many of the implications of their theory are also valid for other intermediaries such as insurance companies, pension funds and securities funds. Observing that the main concern of the regulation of intermediaries is solvency (the relation between equity, debt and asset riskiness), the authors provide institutional background and develop a case for regulation as performing the monitoring functions (screening, auditing, covenant writing and intervention) that dispersed depositors are unable or unwilling to perform. They also illustrate the dangers of regulatory failure in a summary of the S&L crisis of the 1980s. Following a survey of banking theory, the authors develop their model of the capital structure of banks and show how optimal regulation can be achieved using capital adequacy requirements and external intervention when banks are violated. They explain how regulation can be designed to minimize risks of accounting manipulations and to insulate bank managers from macroeconomic shocks, which are beyond their control. Finally, they provide a detailed evaluation of the existing regulation and of potential alternatives, such as rating agencies, private deposit insurance and large private depositors. They show that these reforms are, at best, a complement, rather than a substitute, to the existing regulation which combines capital ratios with external intervention in case of insolvency.
Volume

: pbk ISBN 9780262513869

Description

The Prudential Regulation of Banks applies modern economic theory to prudential regulation of financial intermediaries. Dewatripont and Tirole tackle the key problem of providing the right incentives to management in banks by looking at how external intervention by claimholders (holders of equity or debt) affects managerial incentives and how that intervention might ideally be implemented. Their primary focus is the regulation of commercial banks and S&Ls, but many of the implications of their theory are also valid for other intermediaries such as insurance companies, pension funds, and securities funds. Observing that the main concern of the regulation of intermediaries is solvency (the relation between equity, debt, and asset riskiness), the authors provide institutional background and develop a case for regulation as performing the monitoring functions (screening, auditing, convenant writing, and intervention) that dispersed depositors are unable or unwilling to perform. They also illustrate the dangers of regulatory failure in a summary of the S&L crisis of the 1980s. Following a survey of banking theory, Dewatripont and Tirole develop their model of the capital structure of banks and show how optimal regulation can be achieved using capital adequacy requirements and external intervention when banks are violated. They explain how regulation can be designed to minimize risks of accounting manipulations and to insulate bank managers from macroeconomic shocks, which are beyond their control. Finally, they provide a detailed evaluation of the existing regulation and of potential alternatives, such as rating agencies, private deposit insurance, and large private depositors. They show that these reforms are, at best, a complement, rather than a substitute, to the existing regulation which combines capital ratios with external intervention in case of insolvency. The Prudential Regulation of Banks is part of the Walras Pareto Lectures, from the Universiy of Lausanne.

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