The Behavioural Finance Revolution
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The Behavioural Finance Revolution

A New Approach to Financial Policies and Regulations

Edited by Riccardo Viale, Shabnam Mousavi, Barbara Alemanni and Umberto Filotto

Financial markets are complex. Regulators strive to predict ways in which they can malfunction and create rules to prevent this from happening, yet behavioural impacts are often overlooked. This book explores how behavioural finance can go hand-in-hand with traditional methods to help banks and regulators create better policies. It also demonstrates how the behavioural finance revolution has opened the way to a more integrated approach to the analysis of economic phenomena.
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Chapter 8: Evolutionary regulation and financial behavior

Paolo Mottura

Abstract

Research and studies concerning bank regulation and supervision have rarely crossed paths with behavioral finance. Regulators set rules and supervisors apply them, after interpreting the factual situation and according to their judgment. Therefore regulators and supervisors modify economic agents’ incentives, orient their expectations, and influence their beliefs. Bank customers’ behaviors are very much related to supposed bank liquidity and solvency and, basically, to bank reputation. Regulators and supervisors are major contributors to bank reputation. Bank deposits are believed to be liquid on creditors’ call. Regulators and supervisors bear great responsibility in this since they provide a rationale for trust, because banks’ balance-sheets are inherently opaque. Given that economic agents have a varying degree of financial education, the accountability of regulators and supervisors involves obvious problems of disclosure and communication.

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