presence of supervision by bank regulators. The model uses a principal-agent setting between a bank's owner and its risk … standard approach subsequent to becoming regulated, i.e., the presence of regulation may induce a bank to decrease the quality … internal rating based approach. The paper considers how a bank's preference for a risk management system is affected by the …

asymmetric information the banks face the risk of adverse selection. Credit Value-at-Risk (CVaR) regulation counters the problem … of low quality, i.e. high risk, loans and therefore reduces the risk of the bank loan portfolio. However, CVaR regulation … distorts the operation of credit markets. We show that a binding CVaR constraint introduces credit rationing and lowers social …