Unification in financial sector supervision: The trade‐off between central bank and single authority
| Pages | 151-169 |
| DOI | https://doi.org/10.1108/13581980410810768 |
| Published date | 01 June 2004 |
| Date | 01 June 2004 |
| Author | Donato Masciandaro |
Unification in financial sector supervision:
The trade-off between central bank and
single authority
Donato Masciandaro
Received (in revised form): 24th February, 2004
Bocconi University, Paolo Baffi Centre, Via Sarfatti 25, 20136 Milan, Italy;
tel: +39 (0)25836 5310; fax: +39 (0)25836 5343; e-mail: donato.masciandaro@uni-bocconi.it
Donato Masciandaro is Professor of Mone-
tary Policy at Paolo Baffi Centre, Bocconi
University and Department of Economics,
Mathematics and Statistics, University of
Lecce. He has been a consultant to the
World Bank since 2002 and, prior to that,
the Inter-American Development Bank
(1999–2001) and the United Nations (1998–
99). He has also been a member of the
Directory Board, Paolo Baffi Centre, Boc-
coni University since 2004 and the Interna-
tional Advisory Council, Indian Institute of
Finance, Delhi since 2001. He has been an
associate fellow of the Institute for Interna-
tional Political Studies (ISPI), Milan, since
2001, and editor, Italian Financial System
Report, Rosselli Foundation, Turin, since
1994.
ABSTRACT
KEYWORDS: financial supervision, central
banks, single financial authorities, institu-
tions and law
The objective of this work is to analyse world-
wide trends in financial supervision architec-
tures. The focus is on the key issue in the
debate — the single supervisor versus multi-
authority model — in order to build up indexes
of supervision unification, essential to perform
studies on the causes and effects of various
supervisory regimes. First, the paper introduces
a Financial Authorities’ Concentration (FAC)
Index. A comparative analysis of 69 countries
confirmed that an increase in the degree of con-
centration of supervisory powers is evident in
the developed countries, and particularly in the
European Union.
Secondly, the paper considers the nature of
the institutions to which control responsibilities
are entrusted. In particular, the role the central
bank plays in the various national institutional
settings is examined. An index of the central
bank’s involvement in financial supervision is
introduced, the Central Bank as Financial
Authority (CBFA) Index. Each national insti-
tutional structure can be identified with the two
above characteristics. Two models are the most
frequent: a) countries with a high level of unifi-
cation of powers and weak central bank invol-
vement (single financial authority regimes);
and, b) countries with a low level of unification
of powers and strong central bank involvement
(central bank dominated multiple supervisor
regimes). A trade-off therefore emerges between
the degree of financial sector unification and the
role of the central bank. Two possible explana-
tions of this relationship emerged: the blurring
hazard effect and the monopolistic bureau effect.
INTRODUCTION
This paper presents an economic analysis of
trends in the architectures of financial
supervision. The unification process in
Page 151
Journal of Financial Regulation and ComplianceVolume 12Number 2
Journal of Financial Regulation
and Compliance, Vol. 12, No. 2,
2004, pp. 151–169
#Henry Stewart Publications,
1358–1988
financial institutional settings is explored,
using a sample of 69 countries in order to
build up indices of supervision unification
necessary to study the causes and effects of
various supervisory regimes.
Financial supervision regimes vary sig-
nificantly from country to country. The
review of financial sector supervision
models presented on the following pages
indicates a trend toward the gradual unifi-
cation of supervisory powers. Some coun-
tries have reformed their structures of
financial system supervision by totally
overcoming the institutional approach and
concentrating all the powers and tasks in a
single authority which is responsible for all
sectors.
In Europe this trend toward the concen-
tration of supervisory powers has been
rather strong in recent years: in addition to
Norway, the first country to establish a
single supervisor in 1986, and Iceland
(1988), five European Union (EU) member
states — Austria (2002), Denmark (1988),
Germany (2002), Sweden (1991) and the
UK (1997) — have assigned the task of
supervising the entire financial system to a
single authority different and independent
from the central bank. Four countries
involved in the EU enlargement process —
Estonia (1999), Latvia (1998), Malta (2002)
and Hungary (2000) — have also reformed
their structures, concentrating all the
powers in a single authority.
There is also a widespread tendency to
gradually concentrate supervisory powers.
Various countries (France, Ireland and the
Netherlands) have moved in this direction,
but without going so far as to adopt a
single supervisor different from the central
bank.
The paper is organised as follows. Focus-
ing on the key issue in the debate on finan-
cial supervisory structure, the single
authority versus multi-authority model, the
second section introduces a Financial
Authorities’ Concentration (FAC) Index,
an indicator of the degree of unification in
financial sector supervision. A comparative
analysis of 69 countries is performed in the
third section. Then the fourth section con-
siders the nature of the institutions involved
in the control responsibilities. In particular,
the role the central bank plays in the various
national institutional settings is examined.
An index of the central bank’s involvement
in financial supervision, the Central Bank as
Financial Authority (CBFA) Index is also
introduced. Using both the FAC Index
and the CBFA Index, light is shed on the
trends in financial supervision architectures.
Two models are the most frequent: a)
countries with a high level of unification of
powers and weak central bank involve-
ment (single financial authority regimes);
and, b) countries with a lower level of uni-
fication of powers and strong central bank
involvement (central bank dominated mul-
tiple supervisor regimes). The comparative
analysis therefore evidences a trade-off
between the degree of financial sector uni-
fication and the role of the central bank.
The fifth section discusses the trade-off.
Two possible explanations of this relation-
ship emerge: the blurring hazard effect and
the monopolistic bureau effect. Further-
more, to gauge the possible institutional
determinants of the degree of concentra-
tion of powers, other empirical results are
reviewed. The sixth, and final, section
advances the conclusions as well as perspec-
tives for further research.
THE DEGREE OF UNIFICATION IN
FINANCIAL SECTOR SUPERVISION: THE
FAC INDEX
The natural starting point is the blurring
effect
1
that developments in the banking
and financial industry are having on super-
visory issues.
2
There has been increasing
integration of the banking, securities and
insurance markets, as well as corresponding
products and instruments. The blurring
effect is largely responsible for the increas-
Page 152
Unification in financial sector supervision
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