International versus domestic auditing of bank solvency

This paper examines alternative ways to prevent losses from bank insolvencies. We develop a model that compares two alternative institutions for bank auditing. The first is a system of central bank auditing of national banks. The second is carried out by an international agency that collects and disseminates risk information on banks in all countries. The international auditor is shown to perform at least as well, and sometimes better than, auditing by either central banks or voluntary disclosure by the banks themselves in preventing losses. The international auditor's credibility comes from the fact that its incentives are not distorted by a sovereignty bias.