Optimal Supervisory Policies and Depositor-Preference Laws

42 Pages Posted: 13 Dec 2005  

Henri Pagès

Banque de France

João A. C. Santos

Federal Reserve Bank of New York

Date Written: April 2001

Abstract

When supervisors have imperfect information about the soundness of banks, they may be unaware of insolvency problems that develop in the interval between on-site examinations. Supervising banks more often will alleviate this problem but will increase the costs of supervision. This paper analyzes the trade-offs that supervisors face between the cost of supervision and their need to monitor banks effectively. We first characterize the optimal supervisory policy, in terms of the time between examinations and the closure rule at examinations, and compare it with the policy of an independent supervisor. We then show that making this supervisor accountable for deposit insurance losses in general reduces the excessive forbearance of the independent supervisor and may also improve on the time between examinations. Finally, we extend our analysis to the impact of depositor-preference laws on supervisors' monitoring incentives and show that these laws may lead to conflicting effects on the time between examinations and closure policy vis-à-vis the social optimum.

Keywords: Deposit insurance, depositor preference, supervision

JEL Classification: G21, G28

Suggested Citation

Pagès, Henri and Santos, João A. C., Optimal Supervisory Policies and Depositor-Preference Laws (April 2001). BIS Working Paper No. 131; EFA 2001 Barcelona Meetings. Available at SSRN: https://ssrn.com/abstract=267271 or http://dx.doi.org/10.2139/ssrn.267271

Henri F. Pages

Banque de France ( email )

DGEI 49-1431
Paris Cedex 01, 75049
France
+33 1 42922999 (Phone)
+33 1 42924937 (Fax)

João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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