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.
Incentive Problems in Banking Supervision - the European Case
This paper discusses the incentive conflicts that arise in banking supervision in the EU in a principal-agent framework, where the regulator is the agent and the taxpayers is the principal. The regulatory agent in addition to maintaining financial stability (the objective of the principal) may pursue private interests. Incomplete information, insufficient accountability of the agent and lack of enforceability of compliance result in an incentive problem. A reform of the European supervisory system complemented by strengthening market discipline based on improved disclosure of both the supervisor and the banks may help to solve the European incentive problem.
Corporate Governance and Economic Efficiency: When Do Institutions Matter?
Corporate governance attracted attention beyond the realm of lawyers and quite specific legal rules because of the growing perception that a link existed between corporate governance and corporate performance: better governance, the hypothesis goes, yields more efficient production. The potential link between governance and institutions was given saliency by the large institutional differences between the corporate governance systems of the three most successful industrial economies: Germany's universal bank centered system; Japan's main bank/cross holdings centered system; and the United State's stock market centered system. This paper examines the hypothesized link between corporate governance and economic efficiency through two lenses that highlight the role of national institutions: path dependency and industrial organization. The goal is a clearer understanding of the role of corporate governance institutions as vehicles of adaptive efficiency.