Government, Central Bank and Banking Supervision Reforms: Does Independence Matter?
26 Pages Posted: 17 Jul 2010 Last revised: 20 Nov 2010
Date Written: 2010
We empirically investigate whether central bank independence (CBI) and the monetary policy setting can jointly influence the likelihood that policymakers assign banking supervision to central banks. We find that, conditional on the government being a benevolent one, higher central bank operational freedom (economic independence) is associated with a reduced degree of supervisory powers. We motivate this with the possibility that governments fear the risk of a discretionary misuse of monetary tools. However, it turns that having tight monetary policy goals(a specific form of political independence) increases the odds of a central bank involvement in supervision. Our interpretation is that this may represent a commitment device mitigating the risk of central bank discretion in monetizing financial distress. Our study suggests that CBI can be relevant, not only for the alleged beneficial effects on macroeconomic variables, but also in influencing policymakers’ decisions in terms of banking supervision.
Keywords: Banking supervision, central bank independence, monetary policy
JEL Classification: G18, G28, E50, E52, E58
Suggested Citation: Suggested Citation