Do exchange rate regimes affect the role of central banks as banking supervisors?

Abstract

We investigate the effect that exchange rate regimes have on the degree of central bank involvement in banking supervision. Using both de jure and de facto exchange rate regimes, we find that, conditional on several other factors affecting supervisory power allocation, policymakers are more willing to delegate this task to central banks when the latter are pegging their currency to some kind of parity. This evidence is confirmed when instrumental variables are added, in order to account for possible endogeneity. Results suggest that exchange rate regime features can mitigate the trade offs that political authorities face in evaluating the possibility of assigning supervision to monetary authorities.