The traditional role of banks is to channel funds from savers to those who need them. From the 1990s, however, banks expand their business domains to areas such as development and distribution of new financial products. This trend exposes banks to more risks than ever, which necessitates risk management. To be more specific, a bank's operational efficiency relies heavily on that of its risk management system.
It is certainly not an easy task for savers or regulatory bodies to figure out how well the risk management system will work. This is due largely to the fact that savers and regulatory bodies are less informed than a bank itself about the structure and performance of its portfolios, which creates problems related to moral hazard and adverse selection. Moral hazard emanates from information asymmetry : a bank is led through information asymmetry to overinvest in risky projects. Adverse selection in a regulation setting means that the more poorly a bank is equipped with risk management system, the more severely it overinvests in risk assets. From the regulators' viewpoint, the question is, “how can regulatory agencies deal with the inefficiencies stemming from information asymmetry with allowing banks to remain viable in terms of profitability?”
Regulations on banks are divided into the following three strands. First, regulatory bodies place orders on banks as to what they should and should not do. This is called the ‘command approach.’ For instance, they require that banks maintain certain levels on some measures such as BIS capital ratio. A compulsory membership in the deposit insurance corporation can be another example. The second approach is the ‘internal model approach,’ in which a regulatory agency offers a model to banks that is to be used to measure how much risks they are exposed to. Each bank reports the results that it derives from the model, and accordingly, fulfills the capital adequacy requirement by capital injection. A typical case in this strand is the capital regulation based on VaR (value at risk). The third strand is the ‘incentive approach’. In this approach, a regulatory agency shows banks a menu consisting of the capital amounts and the associated penalty schemes. In response to this menu, each bank spontaneously makes a choice which best suits its objective.
This study designs a theoretical model and conducts simulations to evaluate the aforementioned three approaches with respect to the profitability and the bankruptcy possibility of banks, and to social welfare. To be more specific, for each of the three approaches, the model yields a bank's risk asset ratio and equity level under information asymmetry. The results are as follows.
First, no approach dominates others in terms of the bankruptcy possibility of a bank and social welfare. Second, each approach gives a different investment level in risky assets. The command approach leads a bank to overinvest in risky assets, while the incentive approach makes it underinvest in them. The internal model does the best job in prompting a bank to the investment level near optimum. (The rest is omitted)
효율적 은행규제방안에 대한 연구(A study on efficient banking regulation)
[서울] : 한국금융연구원
|Series Title; No||금융조사보고서 / 2002-03|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||한국금융연구원; KDI 국제정책대학원|