Consolidation or Fragmentation for Financial Regulators? A Story of Information Flow.
53 Pages Posted: 24 Feb 2014 Last revised: 7 Apr 2015
Date Written: August 1, 2013
Two central discussions regarding regulation of the financial sector have been developing alongside each other: one regards the role of central banks in crisis prevention and mitigation, the other considers the efficiency of consolidating the central bank with the bank supervisory functions. Within these debates, operational problems have been largely ignored. Economists have traditionally approached the optimal structure of financial supervision from a public choice angle, focusing on different types of inefficiencies including agency problems, capture of the financial regulator, problems in monitoring, and self- interested regulators. These valuable perspectives sidestep an equally important public administration problem, namely the problem of information-flow in and between the financial regulatory authorities. This paper aims to fill in this gap by highlighting the operational side of information-flow which needs to be taken into account when a country decides to change its financial supervisory structure. The novelty of this paper is in approaching the issue of the optimal structure for financial regulators from the standpoint of organizational design and information–flow, and in bridging the gap between the literature dealing with organizational design, public policy, and financial regulation.
The main conclusion of this paper is that in the field of financial regulation, a fragmented regulatory structure is better equipped to facilitate the kind of information-flow needed in order to prevent and stop a financial crisis from occurring. This conclusion results from two major attributes of the fragmented versus the consolidated model: first, having diversity of regulatory bodies minimizes the chances that market failures will go unnoticed; and second, the structure itself is less hierarchical by at least one layer as compared with the consolidated structure, and thus helps reduce dilution of information and rigidity. As discussed in this paper, the flatter the organization’s pyramid, the easier the flow of information.
Keywords: Financial regulation, information flow, institutional design
JEL Classification: G01, G14, G15, G18, G28, H11, H12, H41, H70, K23, L1, L5
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