Bank regulation and supervision and its welfare implications

This study provides a general equilibrium model to explore the welfare implications of bank regulation and supervision (RS). The model supports the basic expectations regarding the positive effects of RS on the growth rate, output, credit, investment, wages and profits; and its negative effects on the interest rate. In addition, RS is observed to lead to a convergence effect. Furthermore, it is observed that the decision of banks to monitor and charge differentiated interest rates to firms depends on the distribution of firm-specific moral hazard rates; bank monitoring increases profits as the distribution of producer type improves.

► Bank regulation and supervision (RS) affects consumer, bank and producer behavior. ► RS improves welfare and leads to convergence. ► Bank profits increase in RS. ► It is optimal for banks to monitor the better the distribution of producers.