Paper #411

Title:

Should banking supervision and monetary policy tasks be given to different agencies?

Authors:

Carmine Di Noia and Giorgio Di Giorgio

Date:

October 1999

Abstract:

This paper adds some new arguments to the thesis that the responsibility for banking supervision should be assigned to an agency formally separated by the Central bank. We also provide some additional evidence on the macro and microeconomic performance of OECD countries whose banking systems are classified according to the regulatory regime in place. We find that the inflation rate is considerably higher and more volatile in countries where the Central bank acts as a monopolist in banking supervision. Besides, although banks seem to be more profitable when Central banks supervise them, they incur into higher costs and rely more on deposits with respect to more sophisticated liabilities as a funding source. The data are not definitively in favor of functional separation. However, we argue that the evolution of financial intermediaries, moral hazard problems and especially cost accountability seem to suggest that separation would be a better solution for industrialized countries. We also critically discuss the current arrangement of financial regulation and supervision in the EMU: our proposal is to establish an independent European System of Financial Supervisors (ESFS) structured similarly to the ESCB.

Keywords:

Banking supervision, financial stability, regulatory arrangements

JEL codes:

E6, G2

Area of Research:

Finance and Accounting

Published in:

International Finance, 2, 3, (1999), pp. 361-378

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