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Monetary Policy and Banking Supervision: Coordination instead of separation

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  • Gros, Daniel
  • Beck, Thorsten

Abstract

Following the June 2012 European Council decision to place the ‘Single Supervisory Mechanism’ (SSM) within the European Central Bank, the general presumption in the policy discussions has been that there should be ‘Chinese walls’ between the supervisory and monetary policy arms of the ECB. The current legislative proposal, in fact, is explicit on this account. On the contrary, however, this paper finds that there is no need to impose a strict separation between these two functions. The authors argue, in fact, that a strict separation of supervision and monetary policy is not even desirable during a financial crisis when the systemic stability of the financial system represents the biggest threat to a monetary policy that aims at price stability. In their view, the key problem hampering the ECB today is that it lacks detailed information on the state of health of the banking system, which is often highly confidential. Chinese walls would not solve this problem. Moreover, in light of the fact that the new, proposed Supervisory Board will be composed to a large extent of representatives of the same institutions that also dominate the Governing Council, the paper finds that it does not make sense to have Chinese walls between two boards with largely overlapping memberships. In addition, it recommends that some members of the Supervisory Boards should be “independents” in order to reduce the tendency of supervisors to unduly delay the recognition of losses.

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Bibliographic Info

Paper provided by Centre for European Policy Studies in its series CEPS Papers with number 7528.

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Length: 10 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:eps:cepswp:7528

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  1. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999. "Is bank supervision central to central banking?," Working Papers 99-7, Federal Reserve Bank of Boston.
  2. Richard K. Abrams & Michael Taylor, 2000. "Issues in the Unification of Financial Sector Supervision," IMF Working Papers 00/213, International Monetary Fund.
  3. Charles Goodhart, 2000. "The Organisational Structure of Banking Supervision," FMG Special Papers sp127, Financial Markets Group.
  4. Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-60, October.
  5. Schoenmaker, Dirk & Gros, Daniel, 2012. "A European Deposit Insurance and Resolution Fund," CEPS Papers 6918, Centre for European Policy Studies.
  6. Gabriel Jimenez & Steven Ongena & Jose-Luis Peydro & Jesus Saurina, 2012. "Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications," American Economic Review, American Economic Association, vol. 102(5), pages 2301-26, August.
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Cited by:
  1. Neyer, Ulrike & Vieten, Thomas, 2013. "Die neue europäische Bankenaufsicht: Eine kritische Würdigung," DICE Ordnungspolitische Perspektiven 45, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  2. Markus Demary, 2013. "Wie sollte die Europäische Bankenaufsicht mit unterkapitalisierten Banken verfahren?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 66(24), pages 11-14, December.

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