Central Banks or Single Financial Authorities? A Political Economy Approach

The objective of this work is to offer a political delegation approach for the analysis of the financial sector supervision. Focusing on the key issue in the debate on financial supervision structure - single authority versus multi-authorities model - the paper claims that the optimal degree of financial supervision unification cannot be defined a priori; rather it is an expected variable, calculated by the policymakers that maintains or reform the supervisory regime. The adopted approach is to consider the supervisory regime with one or more authorities as an endogenous variable, determined in turn by the dynamics of other structural variables, economic and institutional, that can explain the political delegation process. In order to construct this endogenous variable, it is introduced a Financial Authorities' Concentration Index (FAC Index). Then, given the importance to consider the nature of the institutions involved in the control responsibilities - i.e. what role the central bank plays - it is used as an index of the central bank's involvement in financial supervision, the Central Bank as Financial Authority Index (CBFA Index). Each national supervisory regime can be identified with the two above characteristics. Two the most frequent models: countries with a high concentration of powers with low central bank involvement (Single Financial Authority Regime); countries with a low concentration of powers with high central bank involvement (Central Bank Dominated Multiple Supervisors Regime). Finally, to empirically gauge the possible structural determinants of the degree of supervision unification, it is performed an econometric analysis of the Probit and Logit types. The econometric results signal that the probability of supervision unification is inversely linked to the involvement of the central bank. The two possible explanation of this relationship are the blurring hazard effect and the monopolistic bureau effect. The unification of financial supervision also seems to be a more markedly European phenomenon, linked especially to the Germanic and Scandinavian roots of the legal institutions