Central Banks, Regulatory Capture and Banking Supervision Reforms

Abstract

Should central banks be in charge of micro-prudential as well as of macro-prudential supervision? This paper uses a formal model to analyze that question, and thereby informs the current reform eorts on the elds of banking supervision. Our main nding is that, while there are good reasons for central banks to conduct macroprudential supervision, it is socially optimal that another supervisor conducts micro-prudential supervision when supervisors’ capture by bankers is a concern. JEL classication numbers: D42, G24.