
Contents
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21.1 The Role of Incentive Conflicts and Regulatory Subsidies in Financial Fragility 21.1 The Role of Incentive Conflicts and Regulatory Subsidies in Financial Fragility
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21.2 Ethics Of Supervision 21.2 Ethics Of Supervision
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21.3 Imperfection in the Market for Regulatory Services 21.3 Imperfection in the Market for Regulatory Services
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21.4 Exculpatory Norms in the Culture of Crisis Management 21.4 Exculpatory Norms in the Culture of Crisis Management
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21.4.1 A Formal Model 21.4.1 A Formal Model
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21.4.2 Costs of Modern Crises 21.4.2 Costs of Modern Crises
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21.5 Globalization and Securitization of Bank Funding Opportunities 21.5 Globalization and Securitization of Bank Funding Opportunities
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21.6 Dialectics of a Regulation-Induced Banking Crisis 21.6 Dialectics of a Regulation-Induced Banking Crisis
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21.7 The Role Of Regulatory Competition In Banking Crises 21.7 The Role Of Regulatory Competition In Banking Crises
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References References
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21 Regulation and Supervision: An Ethical Perspective
Get accessEdward J. Kane is the James F. Cleary Professor in Finance at Boston College. He is a member of the US Shadow Financial Regulatory Committee, a visiting scholar at the Federal Reserve Bank of San Francisco, and a senior fellow in the Federal Deposit Insurance Corporation's Center for Financial Research. He is a past president and fellow of the American Finance Association, a former Guggenheim fellow, and a longtime research associate of the National Bureau of Economic Research. He served for twelve years on the finance committee of Teachers Insurance. His BS is from Georgetown University and his PhD from the Massachusetts Institute for Technology.
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Published:07 April 2015
Cite
Abstract
This chapter shows that government credit-allocation schemes generate incentive conflicts that undermine the quality of bank supervision and eventually produce a banking crisis. For political reasons, most countries establish a regulatory culture that embraces three economically contradictory elements: politically directed subsidies to selected bank borrowers; subsidized provision of explicit or implicit repayment guarantees for the creditors of firms that participate in the credit-allocation scheme; and defective government monitoring and control of the distribution of burdens and subsidies that the other two elements produce. In the years leading up to the crisis of 2008, technological change and regulatory competition simultaneously encouraged incentive-conflicted supervisors to outsource much of their due discipline to credit-rating firms and encouraged lenders to securitize their loans in ways that pushed credit risks on poorly underwritten loans into corners of the universe where supervisors and credit-ratings firms would not see them.
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