Central Bank Design and Banking Supervision

Abstract

The agenda of “Central Banking and Monetary Policy: Which Will Be the New Normal?” conference included a timely discussion about the involvement of central banks in the banking supervision, in the context of an optimal design of central banking. In the last 15 years, numerous changes in the institutional structures of prudential supervision have taken place. Prior the global financial crisis, central banks’ involvement in the prudential banking supervision has diminished due to a tendency to unify the prudential supervision in agencies outside of central banks. The aftermath of the global crisis sparked a new wave in which many countries integrated prudential supervision back under the authority of central banks. Nevertheless, the question of the optimal placement of banking supervision still persists while the empirical evidence is yet limited. Our empirical analysis suggests that countries with deeper financial markets and countries undergoing rapid financial deepening can benefit from having bank supervision in the central bank to better foster financial stability.