Architecture Of Financial Supervision Research Articles

Drivers of fintech policy evolution: the role of policy learning and institutions

Despite the increasing importance of financial technology (fintech), there is a gap in research on the drivers of countries’ fintech policy stances. This article contributes to theoretical discussions in the public policy literature by outlining how policy learning and institutions may affect the evolution of national fintech policy stances. To test our theoretical framework, we analyse a comparative case study of the three Baltic states, which have experienced diverging fintech policy trajectories on a national level. We find that policy learning has played a crucial role in fintech policy evolution in the Baltic states. Various fintech-related scandals have revealed policy failures, leading policy makers to adopt a more cautious stance. The evolution of fintech policy stances also interacts with the institutional architecture of financial supervision: an integrated model is more conducive to a proactive stance than a fragmented model. In this way, our article addresses the theoretical and empirical research gap regarding the drivers of fintech policy by outlining how policy learning and institutions can affect its evolution.

A Holistic Approach to the Institutional Architecture of Financial Supervision and Regulation in the EU

A growing consensus has emerged in the post-crisis financial regulatory agenda that the European architecture of financial supervision and regulation is far from ideal. Rather than moving to a ‘holistic’, cross-sectoral regime such as the ‘twin peaks’ model, the post-crisis reform simply upgraded the previous supervisory colleges to EU agencies, resulting in the three sectoral bodies for banking (EBA), securities markets (ESMA), and insurance (EIOPA). The major risk of such a sectoral architecture is that separate agencies may fail to recognise any cross-sectoral problems and risks that are evolving, may fail to adequately address financial conglomerates, and may more generally encounter fundamental challenges in adopting a more holistic approach to financial regulation and supervision. This paper examines the case for adopting a more integrated architecture in the EU. We show that lawmakers were not only unable to seize opportunities for reform – largely, due to path dependencies – but have also let those opportunities pass by when they presented themselves – such as Brexit or the ESAs review. The present political climate does not leave us to expect any significant reform anytime soon. Therefore, we strongly argue that the reform architecture of the EU should be modified incrementally, and without need for Treaty revision. Hence, a bottom-up experimentalist approach appears as a viable path towards the implementation of a twin peaks model, or, possibly as a more viable and desirable path, a hybrid model that nevertheless preserves some of its main advantages.

Independence and Architecture of Financial Supervision: With Focus on the Effects on Banking Stability

Empirical work on the performances of supervisory governance and architecture is scarce relative to the intensifying debates on related institutional arrangements. Using an expansive panel data-set, this paper is a first attempt to explore the effects of governance, architecture and their interactions on banking stability. Empirical analyses reveal that independence matters, as a major governance factor, and the two critical architecture factors, the integration of authorities and the central bank' involvement undermine banking stability. Also, in spite of the interaction between independence and architecture, its effect appears to be limited.

Conglomération financière et architecture de surveillance

Les mutations structurelles survenues au sein de l’industrie des services financiers lors des deux dernières décennies sont couramment avancées pour justifier la tendance à l’unification de l’architecture de la surveillance financière. Cet argument revêt cependant un caractère purement intuitif. A notre connaissance, aucune preuve empirique n’a pu jusqu’à maintenant être apportée à cette intuition. C’est ce que cet article se donne comme objectif. Plus précisément, il tente d’analyser l’incidence des phénomènes de concentration et/ou de conglomération financières sur le choix de l’architecture de la surveillance. Les résultats obtenus tendent à corroborer le pressentiment selon lequel l’émergence des conglomérats financiers et leur développement constituent bel et bien un facteur déterminant de l’unification de la surveillance financière.

How Feasible Is the Proposal for Establishing a New European System of Financial Supervisors?

The impact of the global financial crisis underlined the serious deficiencies in the architecture of financial supervision in the European Union (EU). The necessary reform in the financial sector is in progress and foresees the establishment of a brand new EU-wide administrative network – the European System of Financial Supervisors (ESFS). This article critically examines the legislative proposals for the reform, more specifically the legal basis for the establishment of the network, the envisaged powers of the participants in the network, and the network’s mechanisms of operation. Based on this analysis, it is asserted that serious constitutional challenges preclude the establishment of the new network while inconsistent drafting would adversely affect its functioning.

The Economic Crisis: Did Financial Supervision Matter?

The Asian financial crisis marked the beginning of worldwide efforts to improve the effectiveness of financial supervision. However, the crisis that started in 2007?08 was a crude awakening: several of these improvements seemed unable to avoid or mitigate the crisis. This paper brings the first systematic analysis of the role of two of these efforts - modifications in the architecture of financial supervision and in supervisory governance - and concludes that they were negatively correlated with economic resilience. Using the emerging distinction between macro- and micro-prudential supervision, we explore to what extent two separate institutions would allow for more checks and balances to improve supervisory governance and, thus, reduce the probability of supervisory failure.

The Impact of the Financial Crisis on the European Economic Constitution

The financial crisis challenges the European Economic Constitution in that the two major pillars, the competition rules and the economic freedoms are put into question. This working paper contains the proceedings of a workshop which was held in Florence on the 4th December 2009. Takis Tridimas traces the development of the current institutional architecture of financial supervision and its possible reforms. Susan Emmenegger brings the consumer protection dimension into focus which has to be taken into account when it comes down to revise the architecture. Jurgen Kesler discusses the impact of the financial crisis on competition rules and state aids. Christophe Giolito comments on the role of the European Commission in the management of state aids granted to rescue banks and to stabilise the economy. Harold James and Chris Kobrak combine a historical perspective with an outlook on the impact of the crisis on banks and on competition. Harold James and Hans-W. Micklitz formulate some tentative options on the management of the financial crisis in a broader perspective.

Regulating the Regulators: The Changing Face of Financial Supervision Architectures before and after the Crisis

This paper addresses two crucial questions: what are the main features of the reshaping of the supervisory architectures and what is the role central banks are taking in the changing environment of the financial supervision?

After the Big Bang and Before the Next One? Reforming the Financial Supervision Architecture and the Role of the Central Bank - A Review of Worldwide Trends, Causes and Effects (1998-2008)

Today policymakers in all the countries, shaken by the financial crisis of the 2007-2008, are carefully reconsidering the features of their supervisory architecture. Over the last ten years the financial supervision architecture and the role of the central bank in supervision therein has undergone radical transformation. In the wake of the 2007-08 financial crisis, more countries are considering reforms, while others, who went through a round of reforms, are looking at the architecture once again. This paper reviews the insights gained by the literature on this topic and, based on updated information on 102 countries for the period 1998-2008, addresses three questions: which are the main features of the supervisory architecture reshaping? What explains the increasing diversity of the institutional settings? What are so far the effects of the changing face of banking and financial supervisory regimes on the quality of regulation and supervision?

Politicians, central banks, and the shape of financial supervision architectures

PurposeThis paper aims to investigate the role of the quality of government on financial supervisory structures in different countries.Design/methodology/approachThe objectives are pursued by means of econometric tools based on probit and multinomial logit techniques.FindingsIt is found that the quality of government plays a crucial role in determining supervision unification. “Good” policymakers (helping hand types) prefer a unified financial authority while “bad” ones (grabbing hand type) choose specialized or hybrid models depending on how powerful is the central bank.Research limitations/implicationsResearch limitations are represented by the endogenous nature of political variables with respect to the supervisory design. Suggestions for future research rely on finding adequate instrumental variables to be included in the empirical analysis in order to address causality issues.Practical implicationsThe paper follows a positive approach, explaining why different supervisory structures are observed around the world. As a consequence, it does not provide any normative implication.Originality/valueIts original contribution can be identified in the first attempt to include political preferences in determining the choice among different regimes of financial supervision.

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

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.

Helping hand or grabbing hand?: Politicians, supervision regime, financial structure and market view

Almost all the literature on the evolution of the financial supervision architecture stresses the importance of financial market characteristics in determining the recent trend toward more unification. But in the real world it is not always clear to what extent market features matter. We present two complementary approaches to gain insights in 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 view of government—to determine the impact of the market structure on the supervisory setting. Our evidence seems more consistent with the grabbing hand view, considering the degree of banking concentration 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 confirm a market preference for a more consolidated supervisory regime but reveal only weak consistency between the views of the policymakers and those of the market operators.

Institutions Matter: Financial Supervision Architecture, Central Bank and Path Dependence. General Trends and the South Eastern European Countries

We propose a path-dependence approach to analyzing the evolution of the financial supervisory architecture, focusing on the institutional role of the central bank, and then apply our framework to describing the institutional settings in a selected sample of countries. The policymaker who decides to maintain or reform the supervisory architecture is influenced by the existing institutional setting in a systematic way: the more the central bank is actually involved in supervision, the less likely a more concentrated supervisory regime will emerge, and vice versa (path-dependence effect). We test the path-dependence effect describing and evaluating the evolution and the present state of the architecture of six national supervisory regimes in South Eastern Europe (SEE ): Albania, Bulgaria, Greece, Romania, Serbia, and Turkey. The study of the SEE countries confirms the postulated role of the central bank in the institutional setting. In five cases the high involvement of the central bank in supervision is correlated with a multi-authority regime, while in one case a high degree of financial supervision unification is related with low central bank involvement.

Politicians and Financial Supervision Architectures: Trends and the Italian Case

In recent years we have witnessed a deep change in the design of all the institutions that are responsible for supervising banking and financial markets. The financial supervision scenario is going through a deep evolution on all fronts, and many countries have made important changes in the overall architecture, redefining who is responsible for what. How is the conventional face of supervision changing in all the segments of financial markets? And what are the determinants of one supervisory regime versus another? Our standpoint focuses on the role that politicians can play in reshaping the regime, given that, as a matter of fact, they take the decision to maintain or reform an institutional setting. The paper is organized as follows. In Section Two we describe the actual landscape of the financial supervision architecture in a cross-country perspective. In Section Three we discuss the role that political preferences play in determining the shape of the supervisory setting. The empirical analysis in Section Four allows us to shed light on the factors affecting the choice of supervisory regimes. We discuss the case of Italy in Section Five, while Section Six attempts some preliminary conclusions.

Determinants of Financial Supervision Regimes: Markets, Institutions, Politics, Law or Geography?

This paper assesses the determinants of the recent wave of financial supervision reforms, reviewing six different views concerning the determinants of financial supervision architectures: economic view, market view, law view, political view, geography view and institutional view. The empirical tests provide first support for this view: in a setting characterized by a central bank traditionally less involved in supervision a unified model of supervision seems to be more likely to occur. The role of central bank involvement in supervision still holds when its level of monetary independence is taking in account. Furthermore, the probability that a country will move toward a unified model is higher: the smaller the overall size of the economy; when the legal framework is characterized by German and Scandinavian roots. Therefore, also the economic size view and the law view matter.

Divide et impera: Financial supervision unification and central bank fragmentation effect

This paper analyses how the role of the central bank can influence the unification 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 the three possible channels of moral hazard, bureaucracy, and reputation endowment effects. The empirical analysis–performed with ordered logit and probit functions on a dataset of 89 countries–confirms the robustness of the central bank fragmentation effect.

Financial Supervision Fragmentation and Central Bank Independence: The Two Sides of the Same Coin?

This paper analyses how the central bank's role in the monetary institutional setting can affect the unification process of the overall financial supervision architecture. Using indicators of monetary commitment and central bank independence, we claim that these legal proxies show an inverse link with financial supervision unification. Therefore, the trade off still holds between the supervisory and the central bank involvement per se, however, monetary commitment and independence do also matter. In this respect, in an institutional setting characterized by a central bank deeply and successfully involved in supervision, or legally independent, a multi-authority model is likely to occur.

Financial Supervision Unification and Central Bank Fragmentation Effect

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.

Unification in financial sector supervision: The trade‐off between central bank and single authority

The objective of this work is to analyse worldwide trends in financial supervision architectures. The focus is on the key issue in the debate – the single supervisor versus multiauthority model – in order to build up indexes of supervision unification, essential to perform studies on the causes and effects of various supervisory regimes. First, the paper introduces a Financial Authorities’ Concentration (FAC) Index. A comparative analysis of 69 countries confirmed that an increase in the degree of concentration of supervisory powers is evident in the developed countries, and particularly in the European Union. Secondly, the paper considers the nature of the institutions to which control responsibilities are entrusted. In particular, the role the central bank plays in the various national institutional settings is examined. An index of the central bank’s involvement in financial supervision is introduced, the Central Bank as Financial Authority (CBFA) Index. Each national institutional structure can be identified with the two above characteristics. Two models are the most frequent: (a) countries with a high level of unification of powers and weak central bank involvement (single financial authority regimes); and, (b) countries with a low level of unification of powers and strong central bank involvement (central bank dominated multiple supervisor regimes). A trade‐off therefore emerges between the degree of financial sector unification and the role of the central bank. Two possible explanations of this relationship emerged: the blurring hazard effect and the monopolistic bureau effect.