Politically Robust Financial Regulation

January 8, 2021

Preview Citation

Format: Chicago

Itai Agur. Politically Robust Financial Regulation, (USA: International Monetary Fund, 2021) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The deferred recognition of COVID-induced losses at banks in many countries has reignited the debate on regulatory forbearance. This paper presents a model where the public's own political pressure drives regulatory policy astray, because the public is poorly informed. Using probabilistic game stages, the model parameterizes how time consistent policy is. The interaction between political motivations and time consistency is novel and complex: increased policy credibility can entice the politically-motivated regulator to act in the public's best interest, or instead repel it from doing so. Considering several regulatory instruments, the paper probes the nexus of political pressure, perverse bank incentives and time inconsistent policy.

Subject: Bank solvency, Deposit insurance, Financial crises, Financial sector, Global financial crisis of 2008-2009

Keywords: Bank insolvency, Bank owner, Bank regulation., Bank risk, Financial stability, Political economy, Risk profile, Time inconsistency, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/001
Stock No:

WPIEA2021001
ISBN:

9781513566375
ISSN:

1018-5941

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