Menu
Home
Log in / Register
 
Home arrow Business & Finance arrow Finance
< Prev   CONTENTS   Next >

Supervisory Oversight.

If mandatory disclosure does not work because firms continue to hide relevant information, because the free-rider problem is severe, or because mandatory disclosure would reveal proprietary information, supervisory oversight can come to the rescue and contain conflicts of interest. Supervisors can observe proprietary information about conflicts of interest without revealing it to a financial firm's competitors so that the firm can continue to profitably engage in information production activities. Armed with this information, the supervisor can take actions to prevent financial firms from exploiting conflicts of interest. As part of this supervisory oversight, standards of practice can be developed, either by the supervisor or by the firms engaged in a specific information production activity. Enforcement of these standards would then be placed in the hands of the supervisor.

As we saw in Chapter 11, supervisory oversight of this type is very common in the banking industry. In recent years, bank supervisors have sharpened their focus on risk management. They now examine banks' risk management procedures to ensure that the appropriate internal controls on risk taking have been established at the bank. In a similar fashion, supervisors can examine banks' internal procedures and controls to restrict conflicts of interest. When they find weak internal controls, they can require the financial institution to modify them so that incentives to exploit conflicts of interest are eliminated.

Although supervisory oversight has proved successful in improving internal controls in financial firms in recent years, if the incentives to exploit conflicts of interest are sufficiently strong, financial institutions may still be able to hide conflicts of interest from the supervisors. Furthermore, supervisors have not always done their job well, as we saw in Chapter 11.

 
Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
 
Subjects
Accounting
Business & Finance
Communication
Computer Science
Economics
Education
Engineering
Environment
Geography
Health
History
Language & Literature
Law
Management
Marketing
Philosophy
Political science
Psychology
Religion
Sociology
Travel