Review of Finance Vol. 24 No. 1 2020
Optimal Supervisory Architecture and Financial Integration in a Banking Union
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.
- DOI
- 10.1093/rof/rfz004
- Volume
- 24
- Issue
- 1
- Pages
- 129-161
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref