BoE Paper Examines Impact of Different Supervisory Governance Models
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.
Related Links
Keywords: Europe, UK, Banking, Financial Stability, Supervisory Governance, NPLs, Banking Supervision, BoE
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
IASB Proposes Updates to IFRS Taxonomy for 2019Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.