NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Regulation and Supervision: An Ethical Perspective

Edward J. Kane

NBER Working Paper No. 13895
Issued in March 2008
NBER Program(s):   LE   ME

This essay shows that government credit-allocation schemes generate incentive conflicts that undermine the quality of bank supervision and eventually produce banking crisis. For political reasons, most countries establish a regulatory culture that embraces three economically contradictory elements: politically directed subsidies to selected bank borrowers; subsidized provision of explicit or implicit repayment guarantees for the creditors of banks that participate in the credit-allocation scheme; and defective government monitoring and control of the subsidies to leveraged risk-taking that the other two elements produce. In 2007-2008, technological change and regulatory competition simultaneously encouraged incentive-conflicted supervisors to outsource much of their due discipline to credit-rating firms and encouraged banks to securitize their loans in ways that pushed credit risks on poorly underwritten loans into corners of the universe where supervisors and credit-ratings firms would not see them.

download in pdf format
   (159 K)

email paper

This paper is available as PDF (159 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13895

Published: Regulation and Supervision: An Ethical Perspective Edward J. Kane The Oxford Handbook of Banking Print Publication Date: Jan 2012 Subject: Economics and Finance, Financial Economics, Public Economics and Policy Online Publication Date: Sep 2012 DOI: 10.1093/oxfordhb/9780199640935.013.0012

Users who downloaded this paper also downloaded these:
Kane w6020 Ethical Foundations of Financial Regulation
Barth, Caprio, Jr., and Levine w9323 Bank Regulation and Supervision: What Works Best?
Mian and Sufi w13936 The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
Aizenman w15018 Financial Crisis and the Paradox of Under- and Over-Regulation
Mitchener w12074 Are Prudential Supervision and Regulation Pillars of Financial Stability? Evidence from the Great Depression
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us