01733cas a2200253 a 4500 AALejournalIMF014425 230101c9999 xx r poo 0 0eng d 5.00 USD 9781498338554 1018-5941 BD-DhAAL BD-DhAAL Tressel, Thierry. Optimal Prudential Regulation of Banks and the Political Economy of Supervision / Thierry Tressel, Thierry Verdier. Washington, D.C. : International Monetary Fund, 2014. 1 online resource (61 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students We consider a moral hazard economy in banks and production to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium may not be optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the macro-financial cycle, and that, in presence of production externalities, it should be complemented by a constraint on asset allocation. We show that the political process tends to exacerbate excessive risk taking and credit cycles. Mode of access: Internet Verdier, Thierry. IMF Working Papers; Working Paper ; No. 2014/090 Full text available on IMF http://elibrary.imf.org/view/journals/001/2014/090/001.2014.issue-090-en.xml IMF e-Library