THE HARVARD BUSINESS SCHOOL.

Under the new Capital Accord banks can choose between different type of risk management systems. Using a stylized model of risk management systems which differ in quality and by modelling the relationship between the bank board and the risk manager, we consider the incentives for the adoption of a particular system. We show that in some cases banks may adversely adopt an unsophisticated risk management system in order to evade regulation. JEL G18 ∗We are grateful for the detailed and helpful comments of a anonymous referee, to Sudipto Bhattacharya, Elizabeth Keating, Richard Payne, Jean–Charles Rochet, and seminar participants at the University of Bern, the University of Rome Conference ‘Statistical and Computational Problems in Risk Management: VaR and Beyond VaR’, the Cardiff meeting of the European Monetary Forum for helpful suggestions, and the editor for his support. We wish to thank the Erasmus University Trust fund for a research grant, and the NIAS for its hospitality. Updated versions of the paper may be downloaded from www.RiskResearch.org. Corresponding author Casper G. de Vries, cdevries@few.eur.nl.