Auditing is introduced into a model of bank capital regulation. Deterministic and stochastic auditing strategies are studied. Contrary to intuition, auditing of bank risk should be focused on the safest banks because they hold the least amount of capital. Risky banks, which hold more capital,...

This paper studies bank regulation in the presence of deposit insurance, where banks have private information on their own ability and their investment strategy. Banks choose the mean and variance of their portfolio return. Regulators wish to control banks' risk choice, even though all agents...