Regulatory capture and banking supervision reform

• Published in: Journal of financial stability Vol. 8; no. 3; pp. 206 - 217
• Main Authors: Boyer, Pierre C., Ponce, Jorge
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.09.2012
• Subjects: Banking supervision reform; Financial supervision architecture; Prudential supervision; Regulatory capture; G24; Financial supervision architecture; D42; Banking supervision reform; Prudential supervision; Regulatory capture
• ISSN: 1572-3089; 1878-0962
• DOI: 10.1016/j.jfs.2011.07.002

► We model banking supervision under the threat of capture by bankers. ► We study whether supervisory powers should be concentrated in a single supervisor. ► Concentration increases the likelihood of capture of the supervisor by bankers. ► Splitting supervisory powers is a superior arrangement in terms of social welfare. ► We provide a rationale for reconsidering the current trend toward concentration. We analyze whether banking supervision responsibilities should be concentrated in the hands of a single supervisor. We find that splitting supervisory powers among different supervisors is a superior arrangement in terms of social welfare to concentrating them in a single supervisor when the capture of supervisors by bankers is a concern. This result has implications for the design of banking supervisory architecture and informs current reform efforts in this field.