Optimal Preventive Bank Supervision: Combining Random Audits and Continuous Intervention

Mohamed Belhaj (1) , Nataliya Klimenko (1)

1 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille

Early regulator interventions into problem banks is one of the key suggestions of Basel II. However, no guidance is given on their design. To fill this gap, we outline an incentive-based preventive supervision strategy that eliminates bad asset management in banks. Two supervision techniques are combined: continuous regulator intervention and random audits. Random audit technologies differ as to quality and cost. Our design ensures good management without excessive supervision costs, through a gradual adjustment of supervision effort to the bank's financial health. We also consider preventive supervision in a setting where audits can be delegated to an independent audit agency, showing how to induce agency compliance with regulatory instructions in the least costly way.

Mots clés: moral hazard; delegation; banking supervision; random audit; incentives

Domaines: Economies et finances

Mohamed Belhaj, Nataliya Klimenko. Optimal Preventive Bank Supervision: Combining Random Audits and Continuous Intervention. 2012. ⟨halshs-00790464⟩