Incongruent Incentives in Banking Supervision: The Agent's Problem

Abstract

This paper analyzes the incentives that regulators face when making decisions to take regulatory action. Under the assumptions that the regulator is selfinlerested and taxpayers wish regulators to provide a sate banking environment. three conclusions are reached: 1) the more information that the public has about bank risktaking, the more consistent regulators follow the rules, 2) regulators will not always follow the principal's written directive due to incentive incongruities between the regulators and taxpayers, and 3) as bank portfolio risk increases in banks, the probability of further regulatory action will actually decrease. (L50, L51)