Enhancing Bank Transparency: What Role for the Supervision Authority?

18 Pages Posted: 9 Jul 2010

See all articles by Francesco Giuli

Francesco Giuli

University of Rome III - Department of Economics

Marco Manzo

Ministry of Economy and Finance, Italy

Date Written: November 11, 2009

Abstract

We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bond risks; a unique benevolent public authority aims at maximising investors’ welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on a firm’s true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. By establishing the necessary conditions that allow optimal sanctions to produce the first best equilibrium, we show that the core problem of adverse selection in the corporate bond market does not lie so much in the benevolence of the delegated monitoring system, but rather in the possibility of affecting and sanctioning a firm’s behaviour.

Keywords: Corporate bond, Incentives, Collusion, Regulation

JEL Classification: D82, G28

Suggested Citation

Giuli, Francesco and Manzo, Marco, Enhancing Bank Transparency: What Role for the Supervision Authority? (November 11, 2009). Available at SSRN: https://ssrn.com/abstract=1566564 or http://dx.doi.org/10.2139/ssrn.1566564

Francesco Giuli (Contact Author)

University of Rome III - Department of Economics ( email )

via Ostiense, 139
Rome, 00154
Italy

Marco Manzo

Ministry of Economy and Finance, Italy ( email )

Rome
Italy

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