Allocating Lending of Last Resort and Supervision in the Euro Area
The Maastricht Treaty created the European System of Central Banks and the European Central Bank to head this system. The Treaty entrusted the European Central Bank with the responsibility for monetary policy, but it did not give this institution supervisory powers or an explicit mandate for providing emergency liquidity support to individual banks. National authorities remained responsible for financial stability. As a result, in the euro area some bank regulatory functions are centralized, while others are allocated to not one, but multiple, competing national regulators. Previous researchers have discussed the potential implications of this institutional allocation of regulation on the financial stability of the region. In this chapter, we investigate instead the potential efficiency implications. We focus on the consequences of the allocation of the lender of last resort and supervisory functions for the degree of forbearance in closing distressed banks and for the level of diligence in bank supervision. We conclude that the integration of banking markets without the integration of regulatory functions increases forbearance and decreases supervision. Centralizing regulatory functions will tend to reverse this decline. If only one of the two functions is centralized, then it will be more effective to centralize the supervisory function.
Cooperation in International Banking Supervision
This paper analyses cooperation among national supervisors in the decision to close a multinational bank. The supervisors are asymmetrically informed and exchange information through ’cheap talk’. It is assumed that they consider domestic welfare only. We show that: (1) the supervisors will commit mistakes both of ’type I’ and ’type II’ in the closure decision; (2) the more aligned national interests are, the higher is welfare resulting from the closure decision; (3) the bank can allocate its investments strategically to escape closure; (4) allocating the decision right to an uninformed supranational supervisor can improve closure regulation, especially when interests are very disaligned.
Strategy and Manipulation in Medieval Elections
There are many goals in developing electoral protocols, including a desire for a system which is transparent, in that it is clear what the rule or procedure to follow is; nonmanipulable, in that it is not in a person’s best interest to misrepresent their preferences; honest, in the sense that it elects the ‘right’ candidate; and not open to strategizing, i.e., bribery or collusion. However, these desiderata are in tension with each other: Often, transparent electoral procedures are the least strategy resistant, and many honest procedures encourage manipulation. Thus a balance between these different goals must be sought. In modern times, since the seminal result on vote manipulation, the Gibbard-Satterthwaite Theorem [5, 6], much attention has been devoted to developing voting rules where manipulation is never in the best interest of the voters [4] or which are computationally too complex for the average bounded agent to be able to manipulate [1]. This focus on computational aspects of electoral methods is one of the hallmarks of modern studies on voting. But pursuit of these goals is not restricted to modern times: Those participating in elections in the Middle Ages also sought transparency, non-manipulability, honesty, and strategyproofness in so far as these properties can be consistently expressed in a single procedure. However, given the lack of computational sophistication in the Middle Ages, alternate approaches were needed in order to promote honesty, discourage strategizing, etc. These approaches can be classified as either external (constraints introduced outside of the electoral procedure, such as incentives for coming to consensus quickly) or internal (constraints introduced within the electoral procedure, such as voting rules which cannot be manipulated without adverse effects, or which are too difficult for the average bounded agent to manipulate). Surveying examples of both approaches in the context of medieval ecclesiastical and secular elections provides an interesting comparison to modern electoral procedures. Elections in the Middle Ages were used for the same reasons that they are today: To select suitable candidate(s) for a particular office, duty, or obligation. However, it is important to note that the term electio was used in the Middle Ages in a broader sense than our modern ‘election’. Its primary sense was ‘selection’ or ‘choice’, and only secondarily ‘election’ in the modern sense. Thus, many records which purportedly discuss elections are not discussing elections of the type which interests us. We can identify four categories of medieval electoral processes: (1) Election by an external authority having no direct interest in the election; (2) Indirect election, where electors name other electors who then select or elect the officials; (3) Election by lot; and (4) Election by ballot. Elections of the first and third types are generally computationally uninteresting; the first type corresponds to dictatorial voting rules, and the third type collapses to probability theory. In general, interesting voting methods are found only in the fourth type, election by ballot, though they can also occur in indirect election.