Do we Need One Or More Supervisors?
As indicated above, during the 1990s, there was a move towards consolidation of financial supervision outside central banks, generally justified by the emergence of conglomerates covering all financial activities (banking, insurance, markets), and with the aim of facilitating the flow of information between supervisors in different areas. Masciandaro et al. (2013) study on 102 countries the impact of this movement on the resilience of countries to the GFC, measured by their economic growth during 2008-2009. They find a negative relationship, but the central bank’s involvement has no impact on resilience. However, the authors note that evidence suggests that fragmentation of responsibilities, as well as housing all supervisors in a single institution other than the central bank, is not conducive to financial stability:
- - Nier et al. (2011a) stress that fragmentation is detrimental to financial stability, as evidenced in particular in the case of the US. Agarwal et al. (2014) exploit the fact that “state chartered” banks in the US are subject to dual supervision at regular intervals by both state and federal supervisors. The latter appear significantly less lenient than the former. In addition, some states are more lenient than others, and where state supervision is most lenient, bank failures and the percentage of banks in trouble are higher. According to the authors, this suggests that inconsistent supervision can reduce regulatory efficiency by delaying corrective action and inducing costly variability in the activities of regulated entities.
- - In contrast, in 2007, when financial supervision was concentrated in a single authority outside the central bank (the FSA), the Bank of England, which remained the lender of last resort (Chapter 9), apparently did not have the information necessary to intervene quickly and effectively with Northern Rock whose failure was due to risky funding strategies.
- - The absence in all countries at the outset of the GFC of an institution clearly in charge of macroprudential supervision is now widely recognized as a shortcoming. Edge and Liang (2019) find that, since the GFC, the number of financial stability committees has grown dramatically in number. However, according to the authors, only one-quarter of the 58 committees reviewed have both good processes and good tools to implement macroprudential actions and avoid the risk of policy inaction. Most financial stability committees seem to have been generally designed to improve communication and coordination among existing regulators. However, involving the Ministry of Finance broadens the political legitimacy of macroprudential policy but may also introduce a greater tendency to delay taking actions in response to the build-up of risks.
- - Finally, the revision of the institutional architecture in many of the countries that had previously opted for an FSA-type financial supervisory authority, such as Belgium, Iceland, or the UK, as well as the fact that the latter two countries have experienced extremely costly financial crises suggests that the organization chosen - a single authority outside the central bank - had serious flaws.
It is therefore clear that there is a role for the central bank beyond the oversight of payment systems and intervention as lender of last resort (Chapter 9).
What Role for the Central Bank?
Various arguments have been put forward in favour of separating the activities of central banks (monetary policy and payments systems oversight) from those of microprudential supervisors, particularly banking supervisors, and in favour of combining them, both (10.1.1.2.1) theoretically and (10.1.1.2.2) empirically.