Article Detail

Measuring Financial Supervision Architectures and the Role of Central Banks

Journal 32: Applied Finance

Donato Masciandaro, Marc Quintyn

Today, policymakers in all countries, shocked by the financial crisis of 2007-2008, are reconsidering carefully the features of their supervisory regimes. This paper reviews the changing face of the financial supervisory regimes before and after the crisis, introducing new indicators to measure the level of consolidation in supervision and the degree of the involvement of the central banks.

Until around 15 years ago, the issue of the shape of the financial supervisory architecture was considered irrelevant. The fact that only banking systems were subject to robust and systematic supervision kept several of the current issues in the sphere of irrelevance. Since then, financial market development, resulting in the growing importance of insurance, securities, and pension fund sectors, has made supervision of a growing number of non-bank financial intermediaries, as well as the investor protection dimension of supervision, highly relevant.

In June 1998, most of the responsibility for banking supervision in the U.K. was transferred from the Bank of England to the newly established Financial Services Authority (FSA), which was charged with supervising all segments of the financial system. For the first time a large industrialized country – as well as one of the main international financial centers – had decided to assign the main task of supervising the entire financial system to a single authority, other than the central bank (the U.K. regime was labeled the tripartite system, stressing the need for coordination in pursuing financial stability between the FSA, the Bank of England, and the Treasury). The Scandinavian countries – Norway (1986), Iceland and Denmark (1988) and Sweden (1991) – had preceded the U.K. in the aftermath of domestic financial crises. But after that symbolic date of 1998, the number of unified supervisory agencies started to grow rapidly.

Europe has been the center of gravity regarding the trend towards supervisory consolidation (or unification). In addition to the U.K., three “old” European Union member states – Austria (2002), Belgium (2004), and Germany (2002) – also placed financial supervision under a non-central bank single authority. In Ireland (2003) and the Czech and Slovak Republics (2006), the supervisory responsibilities were concentrated in the hands of the central bank. Five countries that are part of the E.U. enlargement process – Estonia (1999), Latvia (1998), Malta (2002), Hungary (2000), and Poland (2006) – also concentrated all supervisory powers in the hands of a single authority. Outside Europe, unified agencies have been established in, among others, Colombia, Kazakhstan, Korea, Japan, Nicaragua, and Rwanda.

Then came the crisis. Most accounts of the contributing factors point to macroeconomic failures and imbalances as well as regulatory failures [see for instance, Allen and Carletti (2009), Brunnermeier et al. (2009), Buiter (2008)]. While some of these studies also mention, in passing, certain supervisory failures, some other studies analyze in more depth the contribution of supervisory failures to the crisis [for a survey see Masciandaro et al. 2011]. Some of them explicitly mention flaws in the supervisory architecture as a contributing factor in some countries [Buiter (2008) for the U.S. and the U.K. and Leijonhufvud (2009), for the U.S.].

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