A Behavioral Approach to Financial Supervision, Regulation, and Central Banking

This paper describes how behavioral elements are relevant to financial supervision,regulation, and central banking. It focuses on (1) behavioral effects of norms (social, legal,and market); (2) behavior of others (internalization, identification, and compliance); and(3) psychological biases. It stresses that financial supervisors, regulators, and central bankshave not yet realized the full potential that these behavioral elements hold. To do so, theyneed to devise a behavioral approach that includes aspects relating to individual and groupbehavior. The paper provides case examples of experiments with such an approach, includingbehavioral supervision. Finally, it highlights areas for further research