Enhancing Bank Transparency: What Role for the Supervision Authority?

  • Francesco Giuli University of Rome La Sapienza, Department of Public Economics, Italy
  • Marco Manzo Ministry of Economics, Italy and OECD


We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bond risks; a unique benevolent public authority aims at maximising investors’ welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on a firm’s true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. By establishing the necessary conditions that allow optimal sanctions to produce the first best equilibrium, we show that the core problem of adverse selection in the corporate bond market does not lie so much in the benevolence of the delegated monitoring system, but rather in the possibility of affecting and sanctioning a firm’s behaviour.

Key words: Corporate bond, Incentives, Collusion, Regulation.
JEL: D82, G28.

How to Cite
Giuli F., & Manzo M. (2009). Enhancing Bank Transparency: What Role for the Supervision Authority? Panoeconomicus, 56(4), 435-452. doi:10.2298/PAN0904435G
Original scientific paper