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Towards a New Architecture for Financial Stability: Seven Principles

  • Luis Garicano
  • Rosa M. Lastra

This article uses insights from organizational economics and financial regulation to study the optimal architecture of supervision. It suggests that the new architecture should revolve around the following principles: (i) banking, securities and insurance supervision should be further integrated; (ii) the macro-prudential supervisory function must be in the hands of the central bank; (iii) the relation between macro- and micro-supervisors must be articulated through a management by exception system involving direct authority of the macro-supervisor over enforcement and allocation of tasks; (iv) given the difficulty of measuring output on supervisory tasks, the systemic risk supervisor must necessarily be more accountable and less independent than central banks are on their monetary task; (v) the supervisory agency cannot rely on high-powered incentives to motivate supervisors, and must rely on culture instead; (vi) the supervisor must limit its reliance on self regulation; and (vii) the international system should substitute the current loose, networked structure with a more centralized and hierarchical one. Oxford University Press 2010, all rights reserved, Oxford University Press.

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Article provided by Oxford University Press in its journal Journal of International Economic Law.

Volume (Year): 13 (2010)
Issue (Month): 3 (September)
Pages: 597-621

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Handle: RePEc:oup:jieclw:v:13:y:2010:i:3:p:597-621
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  1. 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.
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  17. Skaperdas, S., 1991. "Cooperation, Conflict And Power In The Absence Of Property Rights," Papers 90-91-06a, California Irvine - School of Social Sciences.
  18. Joseph G. Haubrich, 1996. "Combining bank supervision and monetary policy," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
  19. Lastra, Rosa Maria, 2006. "Legal Foundations of International Monetary Stability," OUP Catalogue, Oxford University Press, number 9780199269341.
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