“Flexible and Mandatory Supervision”. 2015. Joint with Alessandro De Chiara (CEU) and Jorge Ponce (Banco Central del Uruguay).
The recent financial crisis has highlighted the need for collecting detailed information about the riskiness of banks’ portfolios. However, an effective supervision of the financial sector entails considerable costs, which include compliance and legal expenses, and generates inefficiencies linked to the threat of regulatory capture. We propose a mechanism which makes supervision of the banking sector more flexible without reducing the amount of information available to the regulator. This is achieved by offering the banks a menu of regulatory profiles which sorts them depending on the riskiness of their portfolios. The mechanism induces the banks that have high incentives to capture the supervisor to choose a profile that bypass supervision.