Financial Supervision Unification and Central Bank Fragmentation Effect

Abstract

This 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 central bank fragmentation effect.