A Shot in the Dark: Can Developing Countries' Bank Regulators Enforce Capital Requirements?
Posted: 4 Aug 2010
Date Written: August 4, 2010
Abstract
Regulators in developing countries may not have access to timely ex-post verifiable information regarding banks' capital or investment decision. This paper examines whether, in such an environment, regulators can enforce capital requirements. Using a model of a relationship between a regulator and a representative bank in a principal-agent framework, I show that, to enforce capital requirements, regulators need to audit banks with some positive probability. This result emphasizes the necessity of having audit policy as a part of prudential regulation of banks in developing countries.
Keywords: capital requirements, bank regulation, audit
JEL Classification: D82, G21, G28
Suggested Citation: Suggested Citation