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The Organisational Structure of Banking Supervision

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  • Charles Goodhart

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    Abstract

    In this paper I try to address the question of whether, and why, it matters whether banking supervision is undertaken in-house in the Central Bank or in a separate specialised supervisory institution. After all, the bank supervisors and those in the Central Bank concerned with systemic stability must continue to work closely together wherever the supervisors are physically located. Nevertheless there has been some recent trend towards hiving off bank supervision to a separate agency, as with the Financial Services Authority (FSA) in the UK. The main driving forces behind this tendency are the changing, more blurred, structure of the financial system, and continuing concerns with conflicts of interest. As the dividing lines between differing kinds of financial institutions become increasingly fuzzy (e.g. universal banks), continuing bank supervision by the Central Bank threatens both inefficient overlap between supervisory bodies and a potential creep of Central Bank safety net, and other, responsibilities into ever-widening areas. With the accompanying trend towards Central Bank operational independence in monetary policy, continued Central Bank supervisory authority enhances concerns about potential conflicts of interest, and raises issues about the limits of delegated powers to a non-elected body. On the other hand, separation of supervision from the Central Bank raises questions whether systemic stability might suffer. The ethos, culture and concerns of the separate supervisory body might come to focus more on conduct of business, consumer protection, issues. Potentially systemic financial crises would have to be handled by a committee, not by a unified Central Bank. How much, if at all, would the collection, transmission and interpretation of information relevant to a Central Banks concerns, both on monetary and systemic stability policy issues, be lost as a consequence of separation. These are, mostly, qualitative issues, and more developed countries, with differing historical, legal and institutional backgrounds, will, and have, come to differing conclusions. But in less developed countries, more weight needs to be placed on ensuring the quality of the supervisory staff, i.e. their professional skills, independence from external pressures, and adequate funding. These latter considerations tell strongly towards retaining banking supervision under the wing of the Central Bank in emerging countries.

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    Bibliographic Info

    Paper provided by Financial Markets Group in its series FMG Special Papers with number sp127.

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    Date of creation: Oct 2000
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    Handle: RePEc:fmg:fmgsps:sp127

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    Web page: http://www.lse.ac.uk/fmg/

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    Cited by:
    1. Henri Sterdyniak & Maylis Avaro, 2013. "Banking union a solution to the euro zone crisis," Sciences Po publications 2013-20, Sciences Po.
    2. Srdjan T. Marinkovic, 2005. "Designing an incentive-compatible safety net in a financial system in transition: the case of Serbia," LSE Research Online Documents on Economics 23375, London School of Economics and Political Science, LSE Library.
    3. Jakob Haan & Sander Oosterloo, 2006. "Transparency and accountability of central banks in their role of financial stability supervisor in OECD countries," European Journal of Law and Economics, Springer, vol. 22(3), pages 255-271, November.
    4. Donato Masciandaro & Marc Quintyn, 2013. "The Evolution of Financial Supervision: the Continuing Search for the Holy Grail," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum.
    5. Thorsten Beck & Daniel Gros, 2012. "Monetary Policy and Banking Supervision: Coordination Instead of Separation," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 13(4), pages 33-39, December.
    6. Friedrich Heinemann & Martin Schüler, 2004. "A Stiglerian View on Banking Supervision," Public Choice, Springer, vol. 121(1), pages 99-130, October.
    7. Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 415-427.
    8. Sabrina R. Pellerin & John R. Walter & Patricia E. Wescott, 2009. "The consolidation of financial market regulation : pros, cons, and implications for the United States," Working Paper 09-08, Federal Reserve Bank of Richmond.
    9. Nout Wellink & Bryan Chapple & Philipp Maier, 2002. "The role of national central banks within the European System of Central Banks: The example of De Nederlandsche Bank," MEB Series (discontinued) 2002-13, Netherlands Central Bank, Monetary and Economic Policy Department.
    10. Alessandro Carretta & Vincenzo Farina & Paola Schwizer, 2010. "The “day after” Basel 2: do regulators comply with banking culture?," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 18(4), pages 316-332, November.
    11. Zenathan Hasannudin, 2012. "The structure of bank supervision and corruption in lending: a study for transition economies," Post-Print dumas-00802139, HAL.
    12. Schüler, Martin, 2003. "How Do Banking Supervisors Deal with Europe-wide Systemic Risk?," ZEW Discussion Papers 03-03, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    13. Sander Oosterloo & Jakob de Haan, 2003. "A Survey of Institutional Frameworks for Financial Stability," DNB Occasional Studies 104, Netherlands Central Bank, Research Department.
    14. repec:spo:wpecon:info:hdl:2441/144pedpca18ff8v7fh3tvnp99m is not listed on IDEAS
    15. Heinemann, Friedrich & Schüler, Martin, 2002. "A Stigler View on Banking Supervision," ZEW Discussion Papers 02-66, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    16. Petr Musílek, 2008. "Institutional Arrangement of Financial Markets Supervision: The Case of the Czech Republic," European Financial and Accounting Journal, University of Economics, Prague, vol. 2008(4), pages 6-21.
    17. Hassan Naqvi, 2004. "Banking Crises and the Lender of Last Resort: How crucial is the role of information?," Finance 0410009, EconWPA.
    18. Stéphanie Stolz, 2002. "Banking Supervision in Integrated Financial Markets: Implications for the EU," CESifo Working Paper Series 812, CESifo Group Munich.
    19. Elliott, Douglas J., 2014. "Lessons for Asia from Europe’s History with Banking Integration," ADBI Working Papers 462, Asian Development Bank Institute.
    20. Ashok Vir Bhatia, 2007. "New Landscape, New Challenges," IMF Working Papers 07/195, International Monetary Fund.

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