How Is Banks Supervision Structured?
Answers
Answer:
the banking supervisors and those in the Central Bank concerned with systemic stability must continue to work closely together wherever the supervisors are physically located.
Nevertheless there has been some recent trend towards hiving off banking supervision to a separate agency, as with the Financial Services Authority (FSA) in the UK. The main driving forces behind this tendency are the changing, more blurred, structure of the financial system, and continuing concerns with conflicts of interest. As the dividing lines between differing kinds of financial institutions become increasingly fuzzy (e.g. universal banks), continuing banking supervision by the Central Bank threatens both inefficient overlap between supervisory bodies and a potential creep of Central Bank safety net, and other, responsibilities into ever-widening areas. With the accompanying trend towards Central Bank operational independence in monetary policy, continued Central Bank supervisory authority enhances concerns about potential conflicts of interest, and raises issues about the limits of delegated powers to a nonelected body.
On the other hand, separation of supervision from the Central Bank raises questions whether systemic stability might suffer. The ethos, culture and concerns of the separate supervisory body might come to focus more on conduct of business and customer protection issues. Potentially systemic financial crises would have to be handled by a committee, not by a unified Central Bank. How much, if at all, would the collection, transmission and interpretation of information relevant to a Central Bank 'sconcerns, both on monetary and systemic stability policy issues, be lost as a consequence of separation?
These are, mostly, qualitative issues, and more developed countries, with differing historical, legal and institutional backgrounds, will, and have, come to differing conclusions. But in less developed countries, more weight needs to be placed on ensuring the quality of the supervisory staff, i.e. their professional skills, independence from external pressures, and adequate funding. These latter considerations tell strongly towards retaining banking supervision under the wing of the Central Bank in emerging countries.