Helping Hand or Grabbing Hand? Politicians, Supervision Regime, Financial Structure and Market View

Abstract

Almost all literature on the evolution of financial supervision architecture stresses the importance of financial market characteristics in determining the recent trend toward more unification. In the real world, however, it is not always clear to what extent market features are important. We present two complementary approaches to gain insight into the above relationship, focusing on the political cost and benefit analysis. First, a cross-country study tests two alternative theories; the helping hand and the grabbing hand views of government; to determine the impact of market structure on the supervisory setting. Our evidence seems more consistent with the grabbing hand view, considering the degree of banking concentration as a proxy of the capture risk, and presuming the market demonstrates a preference for consolidation of supervisory powers. Second, the results of a survey among financial CEOs in Italy confirms a market preference for a more consolidated supervisory regime but reveals only weak consistency between the views of the policymakers and those of market operators.