Bounds in Bank Regulation


In his recent essay, Bounded Institutions, Professor Yair Listokin examines bounded and unbounded structures as two alternative designs for principals to delegate regulatory authority to their agents. Bounds are numerical or quantifiable limitations that are set by the principal on some dimension of the agent’s decisionmaking process, such as a cap, quota, or mandatory curve. Listokin shows that bounds can be used to reach ideal regulatory outcomes even in cases where the principal is uninformed and agent is biased. In this brief response, I extend the logic and intuition of Listokin’s bounded institutions to banking, an area where information gaps and biases are pervasive yet bounds are not prevalent. I argue that bounds are not only feasible but also desirable in banking, first, by showing that the banking environment satisfies the theoretical conditions for bounded institutions, and second, by explaining the ways in which the special features of bounds can help solve the most urgent challenges faced by bank regulators today.

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