Under the new Capital Accord, banks choose between two different types of risk management systems, the standard or the internal rating based approach. The paper considers how a bank's preference for a risk management system is affected by the presence of supervision by bank regulators. The model...

Risk based regulation has emerged as the primary ingredient in the Basel-II proposals, where a bank capital is to become a direct funtion of a bank's riskiness. While the notion that bank capital be risk sensitive is intuitively appealing, the actual implementation, in the form of Basel-II,...