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Incentives for Effective Risk Management
Jon Danielsson, Casper de Vries and Bjorn Jorgensen
Under the new Capital Accord banks can choose between different type of risk management systems. Using a stylized model of risk management systems which differ in quality and by modelling the relationship between the bank board and the risk manager, we consider the incentives for the adoption of a particular system. We show that in some cases banks may adversely adopt an unsophisticated risk management system in order to evade regulation.