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Central Bankers as Supervisors: Do Crises Matter?

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  • Donato Masciandaro
  • Davide Romelli

Abstract

Following the 2007-09 Global Financial Crisis many countries have changed their financial supervisory architecture by increasing the involvement of central banks in supervision. This has led many scholars to argue that financial crises are an important driver in explaining the evolution of the role of central banks as supervisors. In this paper, we formally test whether there is any link between supervisory reforms and the occurrence of financial crises. We study the evolution of financial sector supervision by constructing a new database that captures the full set of supervisory reforms implemented during the period 1996-2013 in a large sample of countries. Our findings support the view that systemic banking crises are important drivers of reforms in supervisory structure. However, we also highlight an equally important “bandwagon” effect, namely a tendency of countries to reform their financial supervisory architecture when others do so as well. Our finding can explain how it is possible to identify a political driver in reforming the supervisory settings notwithstanding the economic theory does not indicate an optimal institutional setting. We construct several measures of spatial spillover effects and show that they can explain institutional similarities among countries and impact the probability of reforming the role of the central bank in financial sector supervision. We also stress the importance of the degree of central bank independence in the choice to concentrate financial supervision in the hands of the central bank. Our results support the view that the traditional theory of central banking has to be integrated with political economy considerations.

Suggested Citation

  • Donato Masciandaro & Davide Romelli, 2015. "Central Bankers as Supervisors: Do Crises Matter?," BAFFI CAREFIN Working Papers 1504, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
  • Handle: RePEc:baf:cbafwp:cbafwp1504
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    Citations

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    Cited by:

    1. Donato Masciandaro & Davide Romelli, 2017. "Twin Peaks And Central Banks: Economics, Political Economy And Comparative Analysis," BAFFI CAREFIN Working Papers 1768, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Donato Masciandaro & Paola Profeta & Davide Romelli, 2016. "Gender and Monetary Policymaking: Trends and Drivers," BAFFI CAREFIN Working Papers 1512, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    3. Donato Masciandaro & Davide Romelli, 2019. "Behavioral Monetary Policymaking: Economics, Political Economy and Psychology," World Scientific Book Chapters,in: Behavioral Finance The Coming of Age, chapter 9, pages 285-329 World Scientific Publishing Co. Pte. Ltd..
    4. Donato Masciandaro, 2018. "Central Banks And Macroprudential Policies: Economics And Politics," BAFFI CAREFIN Working Papers 1878, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Donato Masciandaro & Davide Romelli, 2018. "To Be or not to Be a Euro Country? The Behavioural Political Economics of Currency Unions," BAFFI CAREFIN Working Papers 1883, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. Masciandaro, Donato & Romelli, Davide, 2015. "Ups and downs of central bank independence from the Great Inflation to the Great Recession: theory, institutions and empirics," Financial History Review, Cambridge University Press, vol. 22(03), pages 259-289, December.
    7. Donato Masciandaro & Davide Romelli, 2018. "Beyond the Central Bank Independence Veil: New Evidence," BAFFI CAREFIN Working Papers 1871, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    8. repec:ces:ifodic:v:17:y:2019:i:01:p:30-35 is not listed on IDEAS
    9. Davide Romelli, 2018. "The political economy of reforms in central bank design: evidence from a new dataset," Trinity Economics Papers tep0918, Trinity College Dublin, Department of Economics.
    10. repec:kap:rqfnac:v:53:y:2019:i:1:d:10.1007_s11156-018-0744-3 is not listed on IDEAS
    11. repec:ces:ifodic:v:17:y:2019:i:1:p:50000000005876 is not listed on IDEAS
    12. Sean M. Harkin & Davide S. Mare & Jonathan N. Crook, 2019. "Average pay in banks: do agency problems and bank performance matter?," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 101-122, July.
    13. Oana Peia & Romelli Davide, 2019. "Central Bank Reforms and Institutions," Open Access publications 10197/10911, School of Economics, University College Dublin.
    14. Martin Melecky & Anca Maria Podpiera, 2016. "Central Bank Design and Banking Supervision," BAFFI CAREFIN Working Papers 1630, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

    More about this item

    Keywords

    Financial Supervision; Central Banking; Central Bank Independence; Political Economy; Banking Supervision;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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