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    BoE Paper Examines Impact of Different Supervisory Governance Models

    September 06, 2019

    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. 

     

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    Keywords: Europe, UK, Banking, Financial Stability, Supervisory Governance, NPLs, Banking Supervision, BoE

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