Does Regulatory and Supervisory Independence Affect Financial Stability?

43 Pages Posted: 8 Dec 2020

See all articles by Nicolò Fraccaroli

Nicolò Fraccaroli

Brown University - Watson Institute for International and Public Affairs

Rhiannon Sowerbutts

Bank of England

Andrew Whitworth

Bank of England

Date Written: November 27, 2020

Abstract

Since the crisis financial regulators and supervisors have been given increased independence from political bodies. But there is no clear evidence of the benefits of these reforms on the stability of the banking sector. This paper fills that void, introducing a new dataset of reforms to regulatory and supervisory independence for 43 countries from 1999-2019. We combine this index with bank-level data to investigate the impact of reforms in independence on financial stability. We find that reforms that bring greater regulatory and supervisory independence are associated with lower non-performing loans in banks’ balance sheets. In addition, we provide evidence that these improvements do not come at the cost of bank efficiency and profitability. Overall, our results show that increasing the independence of regulators and supervisors is beneficial for financial stability.

Keywords: Agency independence, financial stability, banking supervision, banking regulation,regulatory agencies

JEL Classification: E58, G28

Suggested Citation

Fraccaroli, Nicolò and Sowerbutts, Rhiannon and Whitworth, Andrew, Does Regulatory and Supervisory Independence Affect Financial Stability? (November 27, 2020). Bank of England Working Paper No. 893, Available at SSRN: https://ssrn.com/abstract=3744309 or http://dx.doi.org/10.2139/ssrn.3744309

Nicolò Fraccaroli (Contact Author)

Brown University - Watson Institute for International and Public Affairs ( email )

111 Thayer Street
Box 1970
Providence, RI 02912-1970
United States

Rhiannon Sowerbutts

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Andrew Whitworth

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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