Advanced Search
MyIDEAS: Login

Institutional Separation between Supervisory and Monetary Agencies

Contents:

Author Info

  • Dirk Schoenmaker

Abstract

This paper investigates whether monetary policy and banking supervision should be separated, or not. It starts with an account of the historical evolution of the Central Banks micro-function (banking supervision). The role of the lender of last resort and the introduction of deposit insurance is discussed. There is currently a diversity of institutional arrangements, but the differences are found to be greater in appearance than in reality. The main argument of divorcing the monetary from the regulatory authority is that the combination of functions might lead to a conflict of interest. This conflict can arise in different ways. The most important instance is that interest rates are held down because of concern with the ¶health¶ of the banking system, when purely monetary considerations suggest higher rates. It is argued that this conflict between ¶regulatory¶ and ¶monetary¶ objectives depends to some extent on the structure of the banking and financial systems (i.e. whether banks are dependent on wholesale or retail markets for short term funding). A First argument against separation is the role of the Central Bank in the payment system, in particular with respect to preventing systemic risk. The massive intra-day credit exposures in large value payment systems could give rise to settlement failure(s), which in turn could generate a systemic crisis. Settlement risk is therefore increasingly an area of supervisory concern for Central Banks. In so far as the Central Bank as lender of last resort is likely to support a failing participant, it is assuming the risks and effectively becoming the implicit guarantor of the system. Although Central Banks implement risk reduction policies, some risks originate beyond the settlement system, e.g. in foreign exchange trading, securities transactions and interbank transactions. It is argued that Central Banks should have a regulatory and oversight role in the payment system, although it does not follow that they should also operate them. Turning to the broader concern of the Central Bank of systemic stability, it is claimed that the Central Bank usually has to use its lender of last resort function not only in cases of liquidity difficulties, but also where the solvency of banks is uncertain. A cross-country survey of 104 bank failures is assembled in an appendix. We focus on the provision of funding for rescues: central bank, deposit insurance, government or other banking system should lie with the agency which pays if, and when , banks are to be rescued. So long as rescue and insurance is undertaken on an implicit Central Bank basis, then the Central Bank would naturally want to undertake regulation and supervision. However, there is a trend towards using tax-payer money for bank rescues which strengthens the case for separation of the monetary and supervisory functions and establishment of a government agency for the latter. It would, however, be difficult to have a complete division, since the Central Bank would generally remain the only source of immediate funding.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.lse.ac.uk/fmg/documents/specialPapers/1990s/sp52.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Special Papers with number sp52.

as in new window
Length:
Date of creation: Jan 1992
Date of revision:
Handle: RePEc:fmg:fmgsps:sp52

Contact details of provider:
Web page: http://www.lse.ac.uk/fmg/

Related research

Keywords:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fmg:fmgsps:sp52. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The FMG Administration).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.