Monetary Policy and Banking Supervision: Still at Arm's Length? A Comparative Analysis

Article excerpt

Abstract

By the early 2000s an increasing number of countries had adopted a well-defined central bank framework, characterized by two intertwined features: stronger specialization for the banking authority in achieving monetary policy goals, and a lessening of its traditional responsibilities for the safeguard of financial stability within its institutional perimeter. The fundamental effect was that Central Bank Involvement in Supervision (CBIS) generally decreased.

But then, after the Financial Crisis erupted in 2008, reforms have been undertaken and projects are being discussed to reconsider the role of the central bank in the field of supervisory tasks. The main research question is then: how is CBIS moving?

This article offers two contributions. Firstly, the economics of the relationship between central banking, monetary policy and banking supervision is reviewed. Secondly, the current situation of CBIS in 88 countries around the world is analyzed.

JEL Classification: G18, G28, E50, E52, E58.

Keywords: Central banking, monetary policy, banking supervision, financial crisis

1. Introduction

In terms of central banking the most interesting innovation to have taken place in the two decades preceding the 2008 Crisis was the progressive split between responsibility for monetary policy and responsibility for banking supervision1. By the early 2000s an increasing number of countries had adopted a well-defined central bank framework, whereby the monetary agency becomes increasingly specialized in achieving monetary policy goals, and consequently its traditional responsibilities in pursuing financial stability seem to be progressively less important. The fundamental effect was that central bank involvement in supervision (hereafter CBIS) generally decreased.

But now a significant number of reforms are currently taking place concerning the central bank's role in the structure of supervision as a consequence of the financial meltdown (hereafter the Crisis).

In 2010, the US legislature passed the Dodd-Frank Act, rethinking of the role of the Fed as part of the general overhaul of financial supervision. Even if during the discussion of the bill US lawmakers debated the possibility of restricting some of the Fed's regulatory powers, as well as increasing political control over the central bank, the Dodd-Frank Act actually ended up increasing the responsibilities of the Fed as prudential supervisor2. In Malaysia, the 2009 Central Bank Law provided for greater involvement in supervision by the central bank3. In the current evolution of the Basel Capital Accord, the activation of countercyclical prudential measures is being put in the hands of central banks4.

In Europe, policymakers are moving to finalize reforms concerning the involvement of central banks in supervision both at the regional and national levels. In 2010, the European Systemic Risk Board (ESRC) was established to provide macro-prudential supervision, and the new institution has been dominated by the European Central Bank (ECB) 5. On June 2012 the heads of state and government of the Eurozone declared that the European Commission would have to present proposals in order to establish an effective single supervisory framework, one which should involve the ECB.

Concerning individual EU members, in 2011, with the new Banking Act, the German government dismantled its unified financial supervisor (BAFIN) in favor of the Bundesbank, which is now the main banking supervisor. In 2010, the UK government put the key prudential functions of the Financial Services Authority (FSA) within the purview of the Bank of England. In 2010, the Irish Financial Services Regulatory Authority was legally merged with the central bank. Further, an analysis of the reforms undertaken in Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Poland and Slovakia reveals that the trend towards supervisory consolidation has definitely not resulted in smaller central bank involvement6. …