9 Pages Posted: 3 Apr 2012
Date Written: April 2, 2012
Investigations into the recent financial crisis have found that banking regulators knew or should have known of many of the problems that would ultimately cripple the finance industry. We argue that their failure to address those problems prior to the crisis was at least partly due to misaligned incentives for bank examiners that encourage inadequate inspection and forbearance and discourage the curbing of ill-advised risk taking. We recommend changing examiners’ incentives to better align them with the public good. Specifically, banking regulators should be “paid for performance” — rewarded for nurturing long-term health for the banks they oversee as well as well-timed decisions to seize control of failing banks.
Suggested Citation: Suggested Citation
Henderson, M. Todd and Tung, Frederick, Paying Bank Examiners for Performance (April 2, 2012). Regulation, Vol. 35, No. 1, Spring 2012; Boston Univ. School of Law, Law and Economics Research Paper No. 12-20; Boston Univ. School of Law, Public Law Research Paper No. 12-20. Available at SSRN: https://ssrn.com/abstract=2033355