Asymmetric information, moral hazard and market discipline in banking supervision

Abstract

In the financial market where information transparency is incomplete, the mere use of prudential ratios for banking
supervision is not enough to effectively control moral hazard of banks. Effective banking supervision must also
rely on the market’s supervision - market discipline. Based on applying incentive compatibility and participation
constraint principle in the information economics, this paper analyzes the bank supervision model that is applied
worlwide and initially proposes some recommendations to improve the efficiency of banking supervision in
Vietnam