Is Banking Supervision Central to Central Banking?

Abstract

Whether central banks should play an active role in bank supervision and regulation is being debated both in the United States and abroad. While the Bank of England has recently been stripped of its supervisory responsibilities and several proposals in the United States have advocated removing bank supervision from the Federal Reserve System, other countries are considering enhancing central bank involvement in this area. Many of the arguments for and against these proposals hinge on the effect this change would have on the ability of the central bank to conduct monetary policy. We find that confidential supervisory information on bank ratings significantly improves forecast accuracy of variables critical to the conduct of monetary policy, which supports the argument that central banks should have bank supervision responsibility.