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Subordinates in Charge: Does Delegation Improve Bank Supervision?

Author

Listed:
  • Dessein, Wouter
  • Gong, Di
  • Lambert, Thomas
  • Wagner, Wolf

Abstract

We develop a model of bias and information loss in supervisory communication and apply it to evaluate a policy reform that delegated supervisory decision-making authority over a subset of bank branches to a lower level. Affected branches become 57-80\% more likely to face supervisory intervention, implying substantial efficiency gains arising from improved detection of banking misconduct and more accurate assessments of its severity. The evidence is inconsistent with alternative explanations, including increased supervisory stringency or greater risk-taking by banks. Our analysis highlights decentralization benefits within supervisory hierarchies specifically, and speaks to the optimal organizational design for fraud detection more broadly.

Suggested Citation

  • Dessein, Wouter & Gong, Di & Lambert, Thomas & Wagner, Wolf, 2026. "Subordinates in Charge: Does Delegation Improve Bank Supervision?," CEPR Discussion Papers 21846, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21846
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    File URL: https://cepr.org/publications/DP21846
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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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