Incentives for Effective Risk Management

Jón Daníelsson, Bjørn N. Jørgensen, Casper G. de Vries

Research output: Contribution to journalJournal articleResearchpeer-review


Under the new Capital Accord, banks choose between two different types of risk management systems, the standard or the internal rating based approach. The paper considers how a bank's preference for a risk management system is affected by the presence of supervision by bank regulators. The model uses a principal–agent setting between a bank's owner and its risk management. The main conclusion is that previously unregulated institutions can be expected to switch to the lower quality standard approach subsequent to becoming regulated, i.e., the presence of regulation may induce a bank to decrease the quality of its risk management system.
Original languageEnglish
JournalJournal of Banking & Finance
Issue number7
Pages (from-to)1407-1425
Number of pages19
Publication statusPublished - 2002
Externally publishedYes


  • Risk management systems
  • Regulation
  • Value-at-Risk
  • Basel-II

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