Allocating supervisory responsibilities to central bankers: Does national culture matter?

Central banks play an important role in the economy. They are responsible for the conduct of monetary policy, and in several countries, they get involved in the supervision of the financial sector. We derive a simple theoretical model to illustrate how culture may influence a politician's choice of regulatory architecture and the assignment of responsibilities when anticipating the impact of that regime on the regulatory agencies’ incentives to cooperate. Using a sample of around 70 countries during the period 1996–2013 we confirm that the extent of supervisory duties that are allocated to the central bank are influenced by national culture. More specifically, consistent with the theoretical predictions, we find that individualism is positively associated, and power distance is negatively associated, with the likelihood of higher central bank involvement in supervision.