Supervisory Governance, Capture and Non‑Performing Loans

41 Pages Posted: 9 Sep 2019

See all articles by Nicolò Fraccaroli

Nicolò Fraccaroli

Bank of England and University of Rome Tor Vergata

Date Written: September 6, 2019

Abstract

Scholars have long believed the governance of banking supervision to affect financial stability. Although the literature has identified at length the pros and cons of having either a central bank or a separate agency responsible for microprudential banking supervision, the advantages of having this task shared by both institutions (shared supervision) have received considerably less attention. This paper fills this void by comparing the impact of three supervisory governance models — supervision by the central bank, by an agency or by both of them — on bank non‑performing loans. Using a new database on supervisory governance in 116 countries from 1970 to 2016, it finds that supervisory governance per se does not significantly affect non‑performing loans. However, it also finds that, where the risk of capture is high, shared supervision is associated with a significant reduction in non‑performing loans. This is in line with the supervisory capture theory, whereby it is more costly to capture two supervisors rather than one. Overall, these results provide new evidence in support of the relevance of supervisory governance in hampering supervisory capture from the banking sector.

Keywords: banking supervision, supervisory governance, supervisory capture, non-performing loans

JEL Classification: D73, E58, G18, G38, P16

Suggested Citation

Fraccaroli, Nicolò, Supervisory Governance, Capture and Non‑Performing Loans (September 6, 2019). Bank of England Working Paper No. 820, September 2019. Available at SSRN: https://ssrn.com/abstract=3449452 or http://dx.doi.org/10.2139/ssrn.3449452

Nicolò Fraccaroli (Contact Author)

Bank of England and University of Rome Tor Vergata ( email )

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