Supervisory Governance, Capture and Non-Performing Loans

38 Pages Posted: 8 Oct 2019

See all articles by Nicolò Fraccaroli

Nicolò Fraccaroli

University of Rome Tor Vergata, Faculty of Economics, Department of Economics, Law and Institutions; Bank of England

Date Written: October 8, 2019

Abstract

Supervisory governance is believed to affect financial stability. While the literature has identified pros and cons of having a central bank or a separate agency responsible for microprudential banking supervision, the advantages of having this task shared by both institutions have received considerably less attention in the literature. Shared supervision has however inherent benefits for the stability of the banking system, as it increases the costs of supervisory capture: capturing a single supervisor, be it the central bank or an agency, has in fact lower costs than capturing two. Nevertheless, while this argument has been proposed theoretically, it has never been tested empirically. This paper fills this void introducing a new dataset on the supervisory governance of 116 countries from 1970 to 2016. It finds that, while nonperforming loans are not significantly affected by supervisory governance per se, they are significantly lower in countries where supervision is shared and the risk of capture is high. This last result, which is robust to a number of controls and robustness checks, proves new evidence in support of the detrimental impact of shared supervision on supervisory capture.

Keywords: banking supervision; supervisory capture; NPLs

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

Suggested Citation

Fraccaroli, Nicolò, Supervisory Governance, Capture and Non-Performing Loans (October 8, 2019). CEIS Working Paper No. 471. Available at SSRN: https://ssrn.com/abstract=3466278 or http://dx.doi.org/10.2139/ssrn.3466278

Nicolò Fraccaroli (Contact Author)

University of Rome Tor Vergata, Faculty of Economics, Department of Economics, Law and Institutions ( email )

Via Columbia, 2
Rome, 00133
Italy

HOME PAGE: http://https://sites.google.com/view/nfraccaroli/home

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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