BoE published a staff working paper that examines the impact of different supervisory governance models on supervisory capture and financial stability. The paper compares supervisory governance models based on supervision by the central bank, by an agency, or by both the central bank and an agency. The paper provides empirical evidence on the relationship between supervisory governance and financial stability and on the inhibiting effect of shared supervision on supervisory capture. The analysis of the impact of the supervisory governance models on nonperforming loans (NPLs) found that NPLs are significantly lower in countries where supervision is shared and the risk of supervisory capture is higher.
Using the database on supervisory governance in 116 countries from 1970 to 2016, the paper finds that supervisory governance does not significantly affect NPLs. However, it also finds that, where the risk of capture is high, shared supervision is associated with a significant reduction in NPLs. NPLs tend to be higher when supervision is conducted by the central bank as a single supervisor, whereas no significant relationship is found with supervision by an agency. This is in line with the supervisory capture theory, wherein it is more costly to capture two supervisors rather than one. Assigning supervisory responsibilities to two institutions rather than one, reduces the risk of supervisory capture, thus lowering the risk-taking behavior of banks. Under shared supervision, each supervisor faces higher informational asymmetries and holds only partial information on the banking system, making it less profitable for supervised banks to capture them. On the contrary, having a single banking supervisor makes capture more likely, allowing banks to take more risk, with negative implications for financial stability. Overall, these results provide new evidence in support of the relevance of supervisory governance in hampering supervisory capture from the banking sector.
In conclusion, the paper suggests that reforms in supervisory governance could have an impact only depending on the institutional setting in which they are implemented. Institutional factors, such as the risk of capture in a country, are able to influence the effectiveness of supervisory governance in keeping the banking system stable. If policy makers want to address reforms in the governance of banking supervision, they should be aware that success of their efforts will be conditional on the existing political economy setting in which the reform is undertaken.
Keywords: Europe, UK, Banking, Financial Stability, Supervisory Governance, NPLs, Banking Supervision, BoE
Previous ArticleECB Concludes Comprehensive Assessment of Six Bulgarian Banks
BIS published a paper that provides an overview on the use of big data and machine learning in the central bank community.
APRA finalized the reporting standard ARS 115.0 on capital adequacy with respect to the standardized measurement approach to operational risk for authorized deposit-taking institutions in Australia.
ECB published a guide that outlines the principles and methods for calculating the penalties for regulatory breaches of prudential requirements by banks.
MAS and The Association of Banks in Singapore (ABS) jointly issued a paper that sets out good practices for the management of operational and other risks stemming from new work arrangements adopted by financial institutions amid the COVID-19 pandemic.
ACPR announced that a new data collection application, called DLPP (Datalake for Prudential), for collecting banking and insurance prudential data will go into production on April 12, 2021.
BCB announced that the Financial Stability Committee decided to maintain the countercyclical capital buffer (CCyB) for Brazil at 0%, at least until the end of 2021.
EIOPA has launched a European-wide comparative study on non-life underwriting risk in internal models, also kicking-off of the data collection phase.
SRB published an overview of the resolution tools available in the Banking Union and their impact on a bank’s ability to maintain continuity of access to financial market infrastructure services in resolution.
EBA is consulting on the implementing technical standards for Pillar 3 disclosures on environmental, social, and governance (ESG) risks, as set out in requirements under Article 449a of the Capital Requirements Regulation (CRR).
ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting