TY  - JOUR
AU  - Kane,Edward J.
TI  - Regulation and Supervision: An Ethical Perspective
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13895
PY  - 2008
Y2  - March 2008
UR  - http://www.nber.org/papers/w13895
L1  - http://www.nber.org/papers/w13895.pdf
N1  - Author contact info:
Edward J. Kane
Department of Finance
Boston College
Chestnut Hill, MA 02467
Tel: 617/552-3986
Fax: 617/552-0431
E-Mail: edward.kane@bc.edu
AB  - 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.
ER  -