Who pays for banking supervision? Principles and trends
| Pages | 303-326 |
| Published date | 31 July 2007 |
| Date | 31 July 2007 |
| DOI | https://doi.org/10.1108/13581980710762291 |
| Author | Donato Masciandaro,Maria J. Nieto,Henriette Prast |
| Subject Matter | Accounting & finance |
Who pays for banking
supervision? Principles and
trends
Donato Masciandaro
Department of Economics, Paolo Baffi Centre, Bocconi University, Milan, Italy
Maria J. Nieto
Banco de Espan
˜a, Madrid, Spain, and
Henriette Prast
De Nederlandsche Bank, Amsterdam, The Netherlands and
Finance Department, Tilburg University, Tilburg, The Netherlands
Abstract
Purpose – This paper aims to analyse the economics of financing banking supervision and attempts
to respond to two questions: What are the most common financing practices? Can the differences in
current financing practices be explained by country-specific factors, using a path-dependence
approach?
Design/methodology/approach – The paper performs an empirical analysis that identifies the
determinants of the financing structure of banks’ prudential supervision using a sample of 90 banking
supervisors (central banks and financial authorities).
Findings – The paper concludes that supervisors in central banks are more likely to be publicly
funded, while financial authorities are more likely to be funded via a levy on the regulated banks. The
financing rule is also explained by the structure of the financial systems. Public funding is more likely
in bank-oriented structures. Finally, the geographical factor is also significant: European bank
supervisors are more oriented towards the private funding regime.
Practical implications – In general, the paper does not find evidence of the role of the political
factor, the size of the economy, the level of development and the legal tradition.
Originality/value – The paper analyses the financial governance of banking supervision in a
sample of 90 countries world-wide. The empirical analysis focuses on the financing rules and identifies
factors that explain the differences between supervisory authorities.
Keywords Banking, Financialmanagement, Governance
Paper type Research paper
1. Introduction
Over the past decade, many countries have witnessed changes in the architecture of
banking supervision[1]. Often the institutional change was triggered by a banking
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Note: The views in this paper are those of the authors and are not necessarily those of
De Nederlandsche Bank, or the Banco de Espan
˜a. The authors thank Paul Moser-Boehm and the
BIS Governance network for helping them to gather information on prudential supervisors’
sources of financing and accountability arrangements. The authors thank, without implicating,
Margherita Saraceno and Rosaria Vega Pansini for excellent research assistance. They also
thank David Mayes, Peter van Els, Lex Hoogduin and Aerdt Houben for their valuable
comments and suggestions. All remaining errors are the authors’ responsibility.
Who pays for
banking
supervision?
303
Journal of Financial Regulation and
Compliance
Vol. 15 No. 3, 2007
pp. 303-326
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980710762291
crisis, which harmed the reputation of the supervisor[2]. But also, policymakers were
pressed to rethink the supervisory structures by changes in the structure of the
financial industry brought about by mergers between banks, insurance companies and
securities firms (conglomeration), internationalisation of the financial activity and the
blurring of distinctions between various types of financial products[3].
Nonetheless, in a number of countries, there is still an ongoing debate about whether
the supervisory structure should be reformed, and if so, in what direction[4].
Recent literature argues that the responsibility for prudential supervision should be
delegated to a specific independent agency, provided that this agency has defined
clear objectives and polit ical independence, it has t he adequate supervisory
instruments to achieve these objectives, and it is held accountable to ensure checks
and balances[5].
Supervisory independence has four dimensions:
(1) regulatory independence, ass ociated with a wide autonom y in setting
prudential rules and regulations;
(2) supervisory independence from political interference and industry intimidation;
(3) institutional autonomy associated with the security of tenure of supervisors;
and
(4) budgetary (financial) independence[6].
Three questions are particularly relevant in the analysis of budgetary independence. Is
there any optimal financing model of supervision? Which are the most common
financing practices? Can we explain differences in current financing practices by
country specific factors?
The objective of this paper is to respond to the second and third questions. To this
end, we present the supervisors’ financing rules in a large number of countries and we
attempt to identify the determinant factors, and explain the differences between
countries. Given that the budget procedure has an important role in the overall banking
supervision architecture, we wish to have a better understanding of the motives behind
the choice of the financing practices. We will qualify the results cum anecdotal
evidence on the budgetary practices.
Budgetary independence and accountability are the two pillars of financial
governance. For the purpose of this paper, financial governance is the set of rules that
defines how prudential supervision is financed, and the accountability arrangements
related to the financial accounts as well as the supervisors activity. The recent
economic literature on governance of supervision has paid little attention to the issue of
financial governance[7]. To the best of our knowledge, there is a dearth of studies on
this question. We will focus on the budgetary rules in this paper.
Furthermore, we will focus on the study of prudential supervision of banks,
although we realise that changes in the structure of the financial industry would also
require the analysis of insurance and securities supervision. In fact, many countrie s
have integrated financial supervision of the three sectors, including in some instances
the supervision of pension funds. Being limited to banks’ prudential supervi sion, this
paper should therefore be regarded as a first contribution to the more comprehensive
analysis of the budgetary governance of financial sector supervision. Moreover, by
limiting ourselves to prude ntial supervision, we overlo ok conduct-of-business
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