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Monetary Policy and Banking Supervision: Coordination instead of separation

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  • Gros, Daniel
  • Beck, Thorsten

Abstract

Following the June 2012 European Council decision to place the ‘Single Supervisory Mechanism’ (SSM) within the European Central Bank, the general presumption in the policy discussions has been that there should be ‘Chinese walls’ between the supervisory and monetary policy arms of the ECB. The current legislative proposal, in fact, is explicit on this account. On the contrary, however, this paper finds that there is no need to impose a strict separation between these two functions. The authors argue, in fact, that a strict separation of supervision and monetary policy is not even desirable during a financial crisis when the systemic stability of the financial system represents the biggest threat to a monetary policy that aims at price stability. In their view, the key problem hampering the ECB today is that it lacks detailed information on the state of health of the banking system, which is often highly confidential. Chinese walls would not solve this problem. Moreover, in light of the fact that the new, proposed Supervisory Board will be composed to a large extent of representatives of the same institutions that also dominate the Governing Council, the paper finds that it does not make sense to have Chinese walls between two boards with largely overlapping memberships. In addition, it recommends that some members of the Supervisory Boards should be “independents” in order to reduce the tendency of supervisors to unduly delay the recognition of losses.

Suggested Citation

  • Gros, Daniel & Beck, Thorsten, 2012. "Monetary Policy and Banking Supervision: Coordination instead of separation," CEPS Papers 7528, Centre for European Policy Studies.
  • Handle: RePEc:eps:cepswp:7528
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    File URL: http://www.ceps.eu/system/files/PB286%20Beck%20%2526%20Gros%20Banking%20Supervision%20in%20ECB_0.pdf
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    References listed on IDEAS

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    1. Gabriel Jimenez & Steven Ongena & Jose-Luis Peydro & Jesus Saurina, 2012. "Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications," American Economic Review, American Economic Association, vol. 102(5), pages 2301-2326, August.
    2. Richard K. Abrams & Michael W Taylor, 2000. "Issues in the Unification of Financial Sector Supervision," IMF Working Papers 00/213, International Monetary Fund.
    3. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999. "Is Bank Supervision Central to Central Banking?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 629-653.
    4. Charles Goodhart, 2000. "The Organisational Structure of Banking Supervision," FMG Special Papers sp127, Financial Markets Group.
    5. 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 539-560, October.
    6. Schoenmaker, Dirk & Gros, Daniel, 2012. "A European Deposit Insurance and Resolution Fund," CEPS Papers 6918, Centre for European Policy Studies.
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    Cited by:

    1. Maylis Avaro & Henri Sterdyniak, 2014. "Banking union: a solution to the euro zone crisis?," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 193-241.
    2. Markus Demary, 2013. "Wie sollte die Europäische Bankenaufsicht mit unterkapitalisierten Banken verfahren?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 66(24), pages 11-14, December.
    3. Neyer, Ulrike & Vieten, Thomas, 2013. "Die neue europäische Bankenaufsicht: Eine kritische Würdigung," DICE Ordnungspolitische Perspektiven 45, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    4. Zuzanna Urbanowicz, 2015. "Nieadekwatność polityki pieniężnej Europejskiego Banku Centralnego w procesie stabilizacji makroekonomicznej w strefie euro," Gospodarka Narodowa, Warsaw School of Economics, issue 4, pages 5-25.
    5. Doumpos, Michael & Gaganis, Chrysovalantis & Pasiouras, Fotios, 2015. "Central bank independence, financial supervision structure and bank soundness: An empirical analysis around the crisis," Journal of Banking & Finance, Elsevier, vol. 61(S1), pages 69-83.
    6. repec:prg:jnlsev:v:2017:y:2017:i:1:id:141:p:17-29 is not listed on IDEAS

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    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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