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Who Should Supervise? The Structure of Bank Supervision and the Performance of the Financial System

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  • Barry Eichengreen
  • Nergiz Dincer

Abstract

We assemble data on the structure of bank supervision, distinguishing supervision by the central bank from supervision by a nonbank governmental agency and independent from dependent governmental supervisors. Using observations for 140 countries from 1998 through 2010, we find that supervisory responsibility tends to be assigned to the central bank in low-income countries where that institution is one of few public-sector agencies with the requisite administrative capacity. It is more likely to be undertaken by a non-independent agency of the government in countries ranked high in terms of government efficiency and regulatory quality. We show that the choice of institutional arrangement makes a difference for outcomes. Countries with independent supervisors other than the central bank have fewer nonperforming loans as a share of GDP even after controlling for inflation, per capita income, and country and/or year fixed effects. Their banks are required to hold less capital against assets, presumably because they have less need to protect against loan losses. Savers in such countries enjoy higher deposit rates. There is some evidence, albeit more tentative, that countries with these arrangements are less prone to systemic banking crises.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17401.

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Date of creation: Sep 2011
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Publication status: published as “ The Architecture and Governance of Financial Supervision: Sources and Implications ” International Finance, Vol. 15, No. 3: 309 - 325, Winter 2012. A lso, NBER Working Paper, 17401, 2011 (with Barry Eichengreen).
Handle: RePEc:nbr:nberwo:17401

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  1. Dirk Schoenmaker, 1992. "Institutional Separation between Supervisory and Monetary Agencies," FMG Special Papers sp52, Financial Markets Group.
  2. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  3. Capie, Forrest & Goodhart, Charles, 1995. "Central banks, macro policy, and the financial system; the nineteenth and twentieth centuries," Financial History Review, Cambridge University Press, vol. 2(02), pages 145-161, October.
  4. Masciandaro, Donato & Quintyn, Marc & Taylor, Michael W., 2008. "Inside and outside the central bank: Independence and accountability in financial supervision: Trends and determinants," European Journal of Political Economy, Elsevier, vol. 24(4), pages 833-848, December.
  5. Michael Taylor & Marc Quintyn, 2002. "Regulatory and Supervisory Independence and Financial Stability," IMF Working Papers 02/46, International Monetary Fund.
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Cited by:
  1. Masciandaro, Donato & Pansini, Rosaria Vega & Quintyn, Marc, 2013. "The economic crisis: Did supervision architecture and governance matter?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 578-596.
  2. 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.

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