Should the Functions of Monetary Policy and Banking Supervision Be Separated?

The paper investigates whether monetary policy and banking supervision should be separated. The main argument for separation is that the combination of functions might lead to a conflict of interest. An argument against is that separation is inconsistent with the central bank's concern for the systemic stability of the financial system. In a cross-country survey of 104 bank failures, we observe a trend towards using taxpayers' money for bank rescues which strengthens the case for hiving off the supervisory function to a government agency. It would, however, be difficult to have a complete division, since the central bank generally remains the only source of immediate funding. Copyright 1995 by Royal Economic Society.