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Gambling bank behaviour, incentive mechanism, and sanctions: A two-stage model

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  • Isabel Strecker

    (University of Freiburg)

Abstract

This article analyses the optimal punishment structure set by a regulator in banking markets under asymmetric information. Relying on a theoretical model, we analyse whether a decreasing, constant, or increasing sanction scheme deters potentially repeated offences in banking. We find that an increasing punishment structure is efficient in reducing gambling bank behaviour. This holds if and only if the regulator’s detection probability is low or the amount gambled by the bank, if it would cheat, is high. With this paper, we provide justification for the current policy practice.

Suggested Citation

  • Isabel Strecker, 2024. "Gambling bank behaviour, incentive mechanism, and sanctions: A two-stage model," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(2), pages 197-208, June.
    • Handle: RePEc:pal:jbkreg:v:25:y:2024:i:2:d:10.1057_s41261-023-00223-w
    DOI: 10.1057/s41261-023-00223-w
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    More about this item

    Keywords

    Banking; Excessive risk; Moral hazard; Enforcement; Repeat offenders;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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