Optimal Supervisory Architecture and Financial Integration in a Banking Union

58 Pages Posted: 29 Nov 2018

Multiple version iconThere are 3 versions of this paper

Date Written: November 28, 2018

Abstract

Both in the United States and in the Euro Area, bank supervision is the joint responsibility of local and central supervisors. I study a model in which local supervisors do not internalize as many externalities as a central supervisor. Local supervisors are more lenient, but banks also have weaker incentives to hide information from them. These two forces can make a joint supervisory architecture optimal, with more weight put on centralized supervision when cross-border externalities are larger. Conversely, more centralized supervision endogenously encourages banks to integrate more cross-border. Due to this complementarity, the economy can be trapped in a suboptimal equilibrium with either too little or too much central supervision, when a superior equilibrium would be achievable.

Keywords: banking union, bank supervision, financial integration

JEL Classification: G28, G21, L51

Suggested Citation

Colliard, Jean-Edouard, Optimal Supervisory Architecture and Financial Integration in a Banking Union (November 28, 2018). HEC Paris Research Paper No. FIN-2018-1319. Available at SSRN: https://ssrn.com/abstract=3292828 or http://dx.doi.org/10.2139/ssrn.3292828

Jean-Edouard Colliard (Contact Author)

HEC Paris - Finance Department ( email )

France

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