The Changing Face of Central
Banking: the Great Reversal
Donato Masciandaro
Bocconi University and SUERF
December 2013
1
Motivation
• After the Financial Crisis politicians in several
countries reconsidered – and still they are
reconsidering - the features of their supervisory
architecture and the role of the central banks
• Three (intertwined) key questions: How to
design the supervisory architecture? How to
involve the central bank? How to define the
authority governance?
• Conclusion: We are observing a sort of “Great
Reversal” which challenges the Mainstream
• Approach: Theory, Institutions and Empirics
2
Background Articles
•
•
•
•
•
•
Financial System Risk: Taxation or Regulation?, Journal of Banking and
Finance, vol.37, n.2, 587-586, 2013, (with Francesco Passarelli).
The Economic Crisis: Did Financial Supervision Matter? IMF Working Paper
Series, n. 261, 2011, International Monetary Fund, Washington (with
Rosaria Pansini and Marc Quintyn), forth. in Journal of Financial Stability
Exploring Governance of the New European Banking Authority: a Case for
Harmonization?, Journal of Financial Stability, .Vol. 7, n.4. 204-214, 2011
(with Maria Nieto and Marc Quintyn)
Reforming Financial Supervision and the Role of the Central Banks: a
Review of Global Trends, Causes and Effects (1998-2008), CEPR Policy
Insight, n.30, 1-11, 2009, (with M. Quintyn)
Politicians and Financial Supervision outside the Central Bank: Why Do
They Do it?, Journal of Financial Stability, volume 5, n.2, 124-147, 2009
Inside and outside the central bank: Independence and Accountability in
Financial Supervision: Trends and Determinants, European Journal of
Political Economy. Vol. 24, n.4. 833- 848. 2008 (with M. Quintyn and M.
Taylor)
3
Before the Crisis
• Three Trends:
• Supervision: Consolidation
• Central Bank Role: Specialization as
Monetary Policy Agent
• Governance: Independence and
Accountability
4
1) Supervision
• Traditional Model: Multi-Authorities (Silos)
Model:
B
BMrkts
S
SMrkts
I
IMrkts
5
1) Supervision
• But integrated markets call for supervisory
reforms:
B
S
I
GLOBAL FINANCIAL MARKETS
6
A wave of reforms …
FIGURE 1 REFORMS OF THE SUPERVISORY ARCHITECTURES PER YEAR (1998-2008)
14
12
NUMBER OF REFORMS
10
8
6
4
2
0
a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
YEARS
7
… In the OECD countries
FIGURE 2 REFORMS OF THE FINANCIAL ARCHITECTURES (1998-2008, %)
0.84
0.82
0.8
PERCENT
0.78
0.76
0.74
0.72
0.7
0.68
EUROPE
EU
OCSE
COUNTRIES
8
Supervision
• Consensus: Light Touch Regulation
• Effects:
• 1) Splitting between Regulation and
Supervision
• 2) Innovative (more Consolidated)
Models:
• A) Single Supervisor (Unified) Model
• B) Peaks Model
9
The Unified Model
UNIFIED SUPERVISOR
US
GLOBAL FINANCIAL MARKETS
10
The Peaks Model
STABILITY SUPERVISOR
CONDUCT OF BUSINESS (
SUPERVISOR
SS
DS
GLOBAL FINANCIAL MARKETS
11
Europe: from Fragmentation …
12
… to Consolidation
13
2) Central Bank
• Central Bank: Less Supervision
14
Specialization
FIGURE 5 CENTRAL BANK AS MAIN SUPERVISOR: CONSERVATIVE VS INNOVATIVE REGIMES (%)
90
80
70
60
PERCENT
• The “traditional”
countries show a
common feature: the
central bank is the sole
(or the main) banking
supervisor in the 80
per cent of the sample
(61 on 76).
• At the same time, the
adoption of an
innovative model of
supervision is centred
on the role of the
central bank in only
very few cases (5 on
26 cases,20 per cent).
50
40
30
20
10
0
CONSERVATIVE REGIMES
INNOVATIVE REGIMES
COUNTRIES
15
Specialization
• Traditional Model: Central Bank as
Banking and Monetary Agent
• But:
• Monetary Policy Effectiveness needs a
Specialized Central Bank
• Then: CB as Monetary Agent
16
Reshaping the CB regime
Politicians
Society
Central Bank
Committed Mandate
Optimal
Monetary
Policy
17
Specialization
• Effects: 1) Less Central Bank
Involvement in Supervision
•
2) Governance Matters
(Independence and Accountability), before
for Central Banking and then for
Supervision
18
Central Bank and Supervision
Source:
Romelli
2012
19
3) Governance
• Good Governance = Ratings for
Independence and Accountability
20
CBI: Global Trends
Source:
Arnone et
al. 2007
21
CBI Trends: Advanced
economies
22
CBI Trends: Emerging markets
23
CBI Trends: Developing
countries
24
Before the Crisis: Follow up
• A) Supervisory consolidation outside
the central bank
• B) Agency Specialisation
• C) Good Governance: Independence,
Accountability
Therefore: Convergence
• NOTE: No distinction between macro and
micro supervision
25
Crisis and Supervisory Indexes:
Empirical Evidence
• Results:
– Negative relationship between public sector
governance and resilience dominates
– Negative relationships between consolidation
and governance index and resilience (most of
the times significant)
– Central bank involvement had no significant
impact
26
After the Crisis: Consolidation in
trouble
FIGURE 1 FINANCIAL SUPERVISION UNIFICATION
80
70
60
FSHH INDEX
50
40
30
20
10
0
ALL
OECD
EUROPE
EU
COUNTRIES
27
After the Crisis: Consolidation in
trouble
28
After the Crisis: Consolidation in
trouble
HYBRID
MODEL
“Traditional” Federal
Financial Supervisors
Consumer
Protection
Financial Oversight
Council
FED
Agency
Banking Markets
SILOS MODEL
Securities Markets
State Financial
Supervisors
FEDERAL
MODEL
Insurance Markets
29
After the Crisis: Consolidation in
trouble
PEAKS MODEL
ECB
European System of
Financial Supervisors
European Systemic
Risk Board
ECB
European Banking
Authority
SILOS MODEL
European Securities
and Markets Authority
European Insurance
and Occupational
Pensions Authority
National Financial
Supervisors
FEDERAL
MODEL
30
After the Crisis: Less Specialization
31
After the Crisis: Less Specialization
32
After the Crisis: Governance in
Trouble?
CAPTURE RISK!
INDEPENDENCE?
Politicians
CB
Regime
Society
How many
Instruments?
CAPTURE RISK!
How Many
Goals?
Banking Industry
33
Conclusion
• Before the Crisis: “Natural” Convergence
• After the Crisis: The Great Reversal
• Approach: More Political Economy, More
Law & Economics, rather than Economics
per se
34