Financial Supervision Fragmentation and Central Bank Independence: The Two Sides of the Same Coin?

This paper analyses how the central banks role in the monetary institutional setting can affect the unification process of the overall financial supervision architecture. Using indicators of monetary commitment and central bank independence, we claim that these legal proxies show an inverse link with financial supervision unification. Therefore, the trade off still holds between the supervisory and the central bank involvement per se, however, monetary commitment and independence do also matter. In this respect, in an institutional setting characterized by a central bank deeply and successfully involved in supervision, or legally independent, a multi-authority model is likely to occur.Financial Supervision, Single Authority, Central Bank Independence, Monetary Commitment

Institutions Matter: Financial Supervision Architecture, Central Bank and Path Dependence. General Trends and the South Eastern European Countries

We propose a path dependence approach to analyze the evolution of the financial supervisory architecture, focusing on the institutional role of the central bank, and then apply our framework to describe the institutional settings in a selected sample of countries. The policymaker who decides to maintain or reform the supervisory architecture is influenced by the existing institutional setting in a systematic way: the more the central bank is actually involved in supervision, the less likely a more concentrated supervisory regime will emerge, and vice versa (path dependence effect). We test the path dependence effect describing and evaluating the evolution and the present state of the architecture of six national supervisory regimes in South Eastern Europe (SEE): Albania, Bulgaria, Greece, Romania, Serbia and Turkey. The study of the SEE countries confirms the postulated role of the central bank in the institutional setting. In five cases the high involvement of the central bank in supervision is correlated with a multi–authority regime, while in one case a high degree of financial supervision unification is related with low central bank involvement.Financial Supervision; Central Banks; Path Dependence; Political Economy; South Eastern Europe.

Introduction

EnThis paper analyses how the central bank role can influence the unification process of the overall financial supervision architecture.We claim that the policymaker's choices can be viewed as a sequential process in which the institutional status quo matters.The degree of unification in supervision is decided based on the position of the central bank.If the central bank involvement in supervision and its reputation are high,the unification level is likely to be low,and vice versa.The central bank fragmentation effect can be explained through three possible channels:the moral hazard effect,the bureaucracy effect,the reputation endowment effect.The empirical analysis-performed with ordered logit and probit functions with a dataset of 89 countries-confirmed the robustness of the cenral bank fragmentation effect