Incentive Audits : A New Approach to Financial Regulation

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.

Bibliographic Details

Main Authors:	Čihák, Martin, Demirgüç-Kunt, Aslı, Johnston, R. Barry
Language:	English en_US
Published:	World Bank, Washington, DC 2013-01
Subjects:	ACCOUNTABILITY, ACCOUNTING, ADVANCED ECONOMIES, ADVERSE SELECTION, ARBITRAGE, ASYMMETRIC INFORMATION, AUDITING, AUDITORS, AUDITS, AUTONOMY, BALANCE SHEET, BANK FAILURES, BANK FOR INTERNATIONAL SETTLEMENTS, BANK HOLDING, BANK HOLDING COMPANIES, BANK OF ENGLAND, BANK REGULATION, BANK RISK, BANKING CRISES, BANKING CRISIS, BANKING INSTITUTIONS, BANKING REGULATION, BANKING SECTOR, BANKING SUPERVISION, BANKING SYSTEM, BANKRUPTCY, BANKRUPTCY PROCEDURES, BANKS, BANQUE DE FRANCE, BOOM-BUST CYCLES, CAPITAL ACCORD, CAPITAL ADEQUACY, CAPITAL RATIOS, CAPITAL REGULATION, CAPITAL REQUIREMENTS, CAPITAL STANDARDS, CENTRAL BANK, CENTRAL BANKING, CHECKS, CLEARING HOUSES, COLLATERAL, COLLATERAL POLICIES, COMMERCIAL BANK, COMMERCIAL BANKS, COMPETITION POLICY, CONFLICT OF INTEREST, CONFLICTS OF INTEREST, CONSUMER PROTECTION, CONTRACT DESIGN, CORPORATE GOVERNANCE, CREDIBILITY, CREDIT CEILINGS, CREDIT DEFAULT, CREDIT DEFAULT SWAPS, CREDIT ENHANCEMENTS, CREDIT EXPANSION, CREDIT GROWTH, CREDIT RATING, CREDIT RATING AGENCIES, CREDIT RATINGS, CREDIT RISK, CREDIT RISK ASSESSMENT, CREDIT WORTHINESS, DEBT, DEBT SERVICE, DEBTORS, DEFAULTS, DEPOSIT, DEPOSIT INSURANCE, DEPOSIT INSURANCE SCHEMES, DERIVATIVES, DEVELOPING COUNTRIES, DEVELOPING ECONOMIES, DISCLOSURE REQUIREMENTS, DUE DILIGENCE, EMERGING MARKETS, EXCHANGE RATE, EXCHANGE RATE REGIMES, EXPOSURE, EXTERNALITIES, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL DERIVATIVES, FINANCIAL DEVELOPMENT, FINANCIAL INFORMATION, FINANCIAL INNOVATION, FINANCIAL INSTITUTION, FINANCIAL INSTITUTIONS, FINANCIAL MARKETS, FINANCIAL POLICIES, FINANCIAL PRODUCTS, FINANCIAL REFORM, FINANCIAL REGULATION, FINANCIAL SAFETY NETS, FINANCIAL SECTOR, FINANCIAL SERVICES, FINANCIAL SERVICES INDUSTRY, FINANCIAL STABILITY, FINANCIAL SYSTEM, FINANCIAL SYSTEM STABILITY, FINANCIAL SYSTEMS, FINANCIAL TRANSACTIONS, FISCAL AUTHORITIES, FLOW OF CREDIT, FOREIGN CURRENCY, GLOBAL FINANCIAL STABILITY, GLOBAL FINANCIAL SYSTEM, GOVERNMENT REGULATION, HEDGE FUNDS, HOME OWNERSHIP, HOUSING, INCENTIVE STRUCTURES, INCOME, INFORMATION ASYMMETRIES, INFORMATION DISCLOSURES, INSURANCE, INSURANCE MARKETS, INTEREST RATE, INTEREST RATE POLICIES, INTEREST RATE SPREADS, INTERNAL CONTROLS, INTERNATIONAL BANK, INTERNATIONAL STANDARDS, INVESTING, INVESTOR PROTECTION, JURISDICTION, JURISDICTIONS, LACK OF TRANSPARENCY, LAWS, LEGISLATION, LENDER, LENDER OF LAST RESORT, LIABILITY, LIQUIDITY, LIQUIDITY RISK, LOAN, MACROECONOMIC POLICY, MANDATES, MARK-TO-MARKET, MARK-TO-MARKET ACCOUNTING, MARKET DISCIPLINE, MARKET FAILURE, MARKET FAILURES, MARKET PARTICIPANTS, MARKET STRUCTURE, MARKET VALUE, MONETARY AUTHORITY, MONETARY FUND, MONETARY POLICY, MORAL HAZARD, MORTGAGE, MORTGAGE LENDING, MORTGAGE MARKET, MORTGAGES, OPERATIONAL INDEPENDENCE, PARTICULAR COUNTRY, PAYMENT SYSTEM, PAYMENTS SYSTEMS, POLICY RESPONSE, POLICY RESPONSES, PORTFOLIO, PRIVATE SECTOR DEVELOPMENT, PRUDENTIAL REGULATION, PRUDENTIAL REGULATIONS, PRUDENTIAL SUPERVISION, PUBLIC FUNDS, RAPID GROWTH, RATING AGENCIES, REAL ESTATE, REGULATOR, REGULATORS, REGULATORY AGENCIES, REGULATORY AUTHORITIES, REGULATORY BODIES, REGULATORY CAPITAL, REGULATORY FRAMEWORK, REGULATORY FRAMEWORKS, REGULATORY GOVERNANCE, REGULATORY REGIMES, REGULATORY SYSTEMS, RETURNS, RISK ASSESSMENTS, RISK CAPITAL, RISK CONTROLS, RISK EXPOSURES, RISK MANAGEMENT, RISK MANAGEMENT SYSTEMS, RISK MANAGERS, RISK MEASUREMENT, RISK TAKING, RISK WEIGHTS, SAFETY NET, SECURITIES, SHAREHOLDERS, SMALL COUNTRIES, SOLVENCY, SOVEREIGN DEBT, SOVEREIGN DEBTS, STOCK OPTIONS, SUPERVISION OF BANKS, SUPERVISORY AUTHORITIES, SUPERVISORY AUTHORITY, SUPERVISORY FRAMEWORK, SUPERVISORY POWERS, SYSTEMIC RISK, SYSTEMIC RISKS, TAX, TAX CODE, TAX INCENTIVES, TAX SYSTEM, TRADING, TRANSPARENCY, TURNOVER, UNDERWRITERS, VALUATIONS, WAGES,
Online Access:	http://documents.worldbank.org/curated/en/2013/01/17155359/incentive-audits-new-approach-financial-regulation https://hdl.handle.net/10986/12199
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