Finance: Research, Policy and Anecdotes

The decade since the Global Financial Crisis has seen changes in the architecture of supervision across Europe.  On the one hand, the tendency to separate the responsibility for monetary and financial stability into two different authorities has been reversed in many countries.  One prominent example is the UK where the Financial Supervisory Authority was dissolved and responsibility for bank supervision returned to the Bank of England.  On the other hand, there has been a move towards more cross-border cooperation between supervisors, which in the case of the Eurozone culminated in the creation of a Single Supervisory Mechanism and the ECB and a Single Resolution Mechanism.

I have co-authored a discussion paper with several academic and ECB colleagues on an early evaluation of these trends, just published.  Unlike a regular paper, this discussion paper takes a broader look at the literature,  complemented with some new theoretical and empirical analysis. Herewith a quick summary:

There are theoretical and empirical arguments for combining or separating the responsibility for monetary and financial stability. The recent crises and past decade, however, have shown that monetary and financial stability cannot be separated and that possible tensions between these objectives do not get more easily resolved if assigned to two different authorities.   Assessing different hypotheses on supervisory architecture is difficult in a cross-country settings, given endogeneity concerns.  However,  we offer some tentative evidence that having an integrated supervisory architecture is not associated with higher inflation or lower growth and there is some tentative evidence that it might help reduce the probability of a credit boom turning nasty.

A lot has been written on the advantages of centralised supervision in the Eurozone, including avoiding supervisory arbitrage, economies of scale in supervision and matching the geographic footprint of banks with the supervisory perimeter.  There are also shortcomings, however, including an increase in distance between supervisors and supervised institutions.  It is certainly too early to come to a clear conclusion on these trade-offs, though it is important to stress that the SSM model is not one of complete but rather partial centralisation, focusing centralised supervision on systemically important institutions and even here combining national and supranational expertise. The next years will certainly see more research in terms of banks’ reaction to these changes in supervisory architecture and its implications for stability.

Overview