Politicians and Financial Supervision Unification Outside the Central Bank: Why Do They Do It?
36 Pages Posted: 8 Jan 2008
Date Written: February 2008
An increasing number of countries shows a trend towards a certain degree of consolidation of powers in financial supervision, which has resulted in the establishment of unified regulators, different from the national central banks. On the contrary a high involvement of the central bank in supervision seems to be correlated with a multi-authorities regime (central bank fragmentation effect). This paper sheds light on which conditions the politicians prefer to implement a unified sector supervision outside the central bank. From a theoretical point of view the quality of public sector governance plays a crucial role in determining the supervision unification. Focusing on the behaviour of the good policymaker (helping hand type), it will prefer a unified financial authority different from the central bank if the correspondent welfare gains - linked to at least one of the four effects: moral hazard, conflict of interest, bureaucracy and reputation - are considered high. The bad policymaker (grabbing hand type) will choose the single financial authority if the financial industry likes it, and the central bank is not a captured one. On the other side, the paper tests the model, investigating the robustness of the institutional position of the central bank in explaining the recent trend in supervision consolidation, with an empirical analysis performed with ordered functions on a updated dataset.
Keywords: Financial Supervision, Central Banks, Political Economy
JEL Classification: G18, G28, E58
Suggested Citation: Suggested Citation