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Regulation, Supervision, and Bank Risk-Taking

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Abstract

This paper presents a model of the interaction between a bank and a supervisor. The bank privately chooses the risk of its investment portfolio and the supervisor collects nonverifiable information on the future solvency of the bank and, based on of this information, may decide on its early liquidation. The paper characterizes the liquidation decision of the supervisor and the risk-taking decision of the bank. In line with recent empirical literature, the paper shows that supervision is effective in ameliorating the bank’s risk-shifting incentives, and that a tougher supervisor leads to lower risk-taking. It also shows that higher noise in the supervisory information may be conducive to lower risk-taking, but that it always reduces welfare.

Suggested Citation

  • Rafael Repullo, 2025. "Regulation, Supervision, and Bank Risk-Taking," Working Papers wp2025_2506, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2025_2506
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    More about this item

    Keywords

    Bank risk-taking; bank supervision; bank regulation; capital requirements; deposit insurance; bank resolution; bank liquidation.;
    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
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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