Politically Robust Financial Regulation

Download or read book Politically Robust Financial Regulation written by Mr.Itai Agur and published by International Monetary Fund. This book was released on 2021-01-08 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: The deferred recognition of COVID-induced losses at banks in many countries has reignited the debate on regulatory forbearance. This paper presents a model where the public's own political pressure drives regulatory policy astray, because the public is poorly informed. Using probabilistic game stages, the model parameterizes how time consistent policy is. The interaction between political motivations and time consistency is novel and complex: increased policy credibility can entice the politically-motivated regulator to act in the public's best interest, or instead repel it from doing so. Considering several regulatory instruments, the paper probes the nexus of political pressure, perverse bank incentives and time inconsistent policy.