Central Bankers as Supervisors: Do Crises Matter?

44 Pages Posted: 27 Apr 2015 Last revised: 23 Mar 2018

See all articles by Donato Masciandaro

Donato Masciandaro

Bocconi University - Department of Economics

Davide Romelli

Trinity College (Dublin) - Department of Economics

Date Written: March 1, 2018

Abstract

Following the 2007-09 Global Financial Crisis many countries have changed their financial supervisory architecture by increasing the involvement of central banks in supervision. This has led many scholars to argue that financial crises are an important driver in explaining the evolution of the role of central banks as supervisors. In this paper, we formally test whether there is any link between supervisory reforms and the occurrence of financial crises. We study the evolution of financial sector supervision by constructing a new database that captures the full set of supervisory reforms implemented during the period 1996-2013 in a large sample of countries. Our findings support the view that systemic banking crises are important drivers of reforms in supervisory structure. However, we also highlight an equally important “bandwagon” effect, namely a tendency of countries to reform their financial supervisory architecture when others do so as well. Our finding can explain how it is possible to identify a political driver in reforming the supervisory settings notwithstanding the economic theory does not indicate an optimal institutional setting. We construct several measures of spatial spillover effects and show that they can explain institutional similarities among countries and impact the probability of reforming the role of the central bank in financial sector supervision. We also stress the importance of the degree of central bank independence in the choice to concentrate financial supervision in the hands of the central bank. Our results support the view that the traditional theory of central banking has to be integrated with political economy considerations.Our results support the view that the traditional theory of central banking has to be integrated with political economy considerations.

Keywords: Financial Supervision, Central Banking, Central Bank Independence, Political Economy, Banking Supervision

JEL Classification: E58, E63, G18.

Suggested Citation

Masciandaro, Donato and Romelli, Davide, Central Bankers as Supervisors: Do Crises Matter? (March 1, 2018). European Journal of Political Economy, Vol. 52, 2018; BAFFI CAREFIN Centre Research Paper No. 2015‐4. Available at SSRN: https://ssrn.com/abstract=2599155 or http://dx.doi.org/10.2139/ssrn.2599155

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Davide Romelli

Trinity College (Dublin) - Department of Economics ( email )

Arts Building
Room 3014
Dublin
Ireland

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