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Regulation and Bankers’ Incentives

Author

Listed:
  • Fabiana Gómez

    (University of Bristol)

  • Jorge Ponce

    (Banco Central del Uruguay)

Abstract

We study the effects of minimum capital requirements, capital buffers, liquidity regulation and loan loss provisions on the incentives of bankers to exert effort and take excessive risk. These regulations impact differently the behavior of bankers. Capital regulation, liquidity requirements and traditional loan loss provisions for expected losses provide adequate incentives to bankers. Capital requirements are the most powerful instrument. Counter-cyclical (so-called dynamic) loan loss provisions may provide bankers with incentives to gamble. The results help informing the ongoing debate about the harmonization of banking regulation and the implementation of Basel III.

Suggested Citation

  • Fabiana Gómez & Jorge Ponce, 2019. "Regulation and Bankers’ Incentives," Journal of Financial Services Research, Springer;Western Finance Association, vol. 56(3), pages 209-227, December.
    • Handle: RePEc:kap:jfsres:v:56:y:2019:i:3:d:10.1007_s10693-018-0303-z
    DOI: 10.1007/s10693-018-0303-z
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    Cited by:

    1. Frache, Serafín & García-Cicco, Javier & Ponce, Jorge, 2023. "Countercyclical prudential tools in an estimated DSGE model," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(3).
    2. Selay Sahan & Euan Phimister, 2022. "Worker Incentives in the Banking Industry," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(2), pages 259-284, April.

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    More about this item

    Keywords

    Banking regulation; Minimum capital requirement; Capital buffer; Liquidity requirement; (Counter-cyclical) loan loss provision; Bankers’ incentives; Effort; Risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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