Why Is It Important and What Are the Issues?
Prudential supervision, broadly construed, involves government regulation and monitoring of the banking system to ensure its safety and soundness. This chapter addresses the following questions: Why is prudential supervision so important, and why does it take the form it does? It first outlines what problems asymmetric information creates for the financial system and shows that the presence of asymmetric information explains why banks are so important. It then explains why prudential supervision of these institutions is needed, and what forms it takes. The chapter concludes by outlining the key issues in the design of prudential supervision and uses them to organize a general discussion of the chapters in this volume, providing a brief overview of their contents. The linkages between these chapters are explored in order to highlight some general conclusions.
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