Hierarchical bank supervision

Abstract

This paper presents a model in which a central and a local supervisor contribute their efforts to obtain information on the solvency of a local bank, which is then used by the central supervisor to decide on its early liquidation. This hierarchical model is contrasted with the alternatives of decentralized and centralized supervision, where only the local or the central supervisor collects information and decides on liquidation. The local supervisor has a higher bias against liquidation (supervisory capture) and a lower cost of getting local information (proximity). Hierarchical supervision is the optimal institutional design when the bias of the local supervisor is high but not too high and the costs of getting local information from the center are low but not too low. With low (high) bias and high (low) cost it is better to concentrate all responsibilities in the local (central) supervisor.

Stakeholder governance and the CSR of banks: An analysis of an internal governance mechanism based on game theory

“…Therefore, the restraint mechanism from the product market cannot play a fundamental role in the external governance mechanism of commercial banks (Zhang and Wu, 2020;Klein et al, 2021). Second, strong regulation would limit the effect of market power and equity constraints on banks (Repullo, 2018;Calzolari et al, 2019;Grunewald, 2021). In view of the strong contagion effect of bank failures, governments have generally established safety nets to protect banks.…”

Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers

“…See e.g. Laffont and Tirole, 1991;Laffont, 1999;Agarwal et al, 2014;Repullo, 2017;Igan and Lambert, 2019. On the other hand, the central supervisor is also likely to benefit from broader and more efficient resources (Draghi, 2018). The new supranational authority relies on a larger number of highly specialized employees recruited from a broader market while offering more competitive compensation schemes, which should allow for more effective supervisory practices.…”

“…The first one relates to the different incentive structures associated to each institutional setting whereby centralised supervisors are less likely to be captured by banks -the incentive hypothesis. The incentive structure of local supervisors might induce a more lenient attitude toward bank risk-taking, and this is likely to be less relevant for a supranational supervisor (Agarwal et al, 2014, Carletti, Dell'Ariccia andMarquez, 2016;Repullo 2017). More generally, new institutions may promote better economic outcomes via different incentives (e.g.…”

“…On the one hand, local (national) supervisors may have better information than more centralised (supranational) supervisors; but, on the other hand, they may be more lenient or prone to local capture (because of different incentives). Supranational supervision might therefore potentially be more independent, avoiding national biases and collusion, while also having access to broader resources (Hayek, 1945;Agarwal et al, 2014;Carletti et al, 2016;Hakenes and Schnabel, 2014;Laffont and Martimort, 1999;Repullo, 2017;Constâncio, 2013).…”

Cross-Border Spillover Effects of Macroprudential Policies: A Conceptual Framework

“…They find that if the national and the centralised prudential authorities do not share the same objectives, the information flow between the two layers may be impeded and could give rise to excessive leniency of supervision. In the same vein, Repullo (2018) presents a theoretical model whereby the optimal level of prudential centralisation hinges on the relative costs between the national and centralised supervisors of collecting information relevant for taking prudential decisions.…”