Publication: Incentive Audits : A New Approach to Financial Regulation
Date
2013-01
ISSN
Published
2013-01
Author(s)
Abstract
A large body of evidence points to
misaligned incentives as having a key role in the run-up to
the global financial crisis. These include bank
managers' incentives to boost short-term profits and
create banks that are "too big to fail,"
regulators' incentives to forebear and withhold
information from other regulators in stressful times, and
credit rating agencies' incentives to keep issuing high
ratings for subprime assets. As part of the response to the
crisis, policymakers and regulators also attempted to
address some incentive issues, but various outside observers
have criticized the response for being insufficient. This
paper proposes a pragmatic approach to re-orienting
financial regulation to have at its core the objective of
addressing incentives on an ongoing basis. Specifically, the
paper proposes "incentive audits" as a tool that
could help in identifying incentive misalignments in the
financial sector. The paper illustrates how such audits
could be implemented in practice, and what the implications
would be for the design of policies and frameworks to
mitigate systemic risks.
Citation
“Čihák, Martin; Demirgüç-Kunt, Aslı; Johnston, R. Barry. 2013. Incentive Audits : A New Approach to Financial Regulation. Policy Research Working Paper; No. 6308. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/714171be-4d19-5d0a-b4bb-9e8bac755a0c License: CC BY 3.0 IGO.”
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