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Jean-Edouard Colliard, Optimal Supervisory Architecture and Financial Integration in a Banking Union, Review of Finance, Volume 24, Issue 1, February 2020, Pages 129–161, https://doi.org/10.1093/rof/rfz004
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Abstract
Both in the USA and in the Euro area, bank supervision is the joint responsibility of local and central supervisors. I study a model in which local supervisors do not internalize as many externalities as a central supervisor. Local supervisors are more lenient, but banks also have weaker incentives to hide information from them. These two forces can make a joint supervisory architecture optimal, with more weight put on centralized supervision when cross-border externalities are larger. Conversely, more centralized supervision endogenously encourages banks to integrate more cross-border. Due to this complementarity, the economy can be trapped in a suboptimal equilibrium with either too little or too much central supervision, when a superior equilibrium would be achievable.