Bank Regulation and Banking Stability

Abstract

This note discusses some issues in bank closure policy from a financial stability standpoint and how these issues have evolved since we first raised the question of how a reputation-driven divergence of interests between bank regulators and taxpayers may distort bank closure policy in our 1993 paper in The American Economic Review. Regulators now deploy a richer set of policy instruments to deal with financially distressed banks, and this increases the complexity of ensuring that the impact of the taxpayer-regulator incentive conflict is minimized. We also include with this note the working paper version of our 1993 paper which has all the proofs that were not included in the published version.

Keywords: Bank regulation, career concerns, closure policy

JEL Classification: G2, G21, G28