Towards a New Architecture for Financial Stability: Seven Principles

Abstract

In this paper we use insights from organizational economics and financial regulation to study the optimal architecture of supervision. We suggest that the new architecture should revolve around the following principles: (i) banking, securities and insurance supervision should be further integrated; (ii) macro prudential supervisory function must be in the hands of the central bank; (iii) the relation between macro and micro supervisors must be articulated through a management by exception system involving direct authority of the macro supervisor over enforcement and allocation of tasks; (iv) given the difficulty of measuring output on supervisory tasks, the systemic risk supervisor must necessarily be more accountable and less independent than Central Banks are on their monetary task; (v) the supervisory agency cannot rely on high powered incentives to motivate supervisors, and must rely on culture instead; (vi) the supervisor must limit its reliance on self regulation; and (vii) the international system should substitute the current loose, networked structure for a more centralized and hierarchical one.

Independence and Architecture of Financial Supervision: With Focus on the Effects on Banking Stability

“…2. Refer generally to Barth et al (2003), Monkiewicz (2007), Garicano and Lastra (2010) and Masciandaro (2004Masciandaro ( , 2007Masciandaro ( , 2009). See Sufian and Habibullah (2011) for the summary of the literature on the importance of the banking sector for the economy.…”

“…Despite these generally negative findings, after 2008, a handful of experts argued for the central bank's supervisory role, particularly for its principal charge of macroprudential supervision (Garicano & Lastra, 2010;Nier et al, 2011, etc.). However, empirical findings that support this argument have yet to appear.…”

Future of Regional Cooperation in Asia and the Pacific

“…Prevention is dealt with through a framework of systemic risk control and robust prudential regulations. Crisis management and resolution, on the other hand, require established supervisory and resolution structures, which in an integrated market, must have a cross-border remit to override the principle of home country control (Garicano and Lastra 2010). A careful look at the developmental phase of European institution building reveals this has been a process of experimentation rather than design.…”

Fault Lines and Issue Linkages at the G20: New Challenges for Global Economic Governance

“…Most importantly, the US Congress had passed the Dodd‐Frank Wall Street Reform and Consumer Protection Act a few months earlier, and it was signed into law by President Obama on 21 July 2009. At the same time, the European Commission and the EU Parliament were moving forward with proposals for a new financial supervisory infrastructure following the Larosiere Report (Garicano and Lastra, ). This led G20 leaders to sharpen their commitments regarding financial regulatory reform.…”