The Economics of Supranational Bank Supervision

Abstract

This paper examines the effectiveness of cooperation among bank supervisors using anovel dataset on supranational agreements among 4,278 country-pairs. Exploiting that globally operating banks are differently covered by these agreements, we show that supervisory cooperation generally improves bank stability. The magnitude of the effect is higher for smaller and less complex banks, and when supervisors are more stringent and have access to higher quality information. We also show that actual supervisory cooperation varies across country-pairs consistent with differences in economic costs and benefits to cooperation. This suggests that cooperation is not always desirable, despite being effective in reducing bank risk

Keywords: Supranational supervisory cooperation; cross-border banking; externalities

JEL Classification: G1, G2