Staff Working Paper No. 820
By Nicolo Fraccaroli
Scholars have long believed the governance of banking supervision to affect financial stability. Although the literature has identified at length the pros and cons of having either a central bank or a separate agency responsible for microprudential banking supervision, the advantages of having this task shared by both institutions (shared supervision) have received considerably less attention. This paper fills this void by comparing the impact of three supervisory governance models — supervision by the central bank, by an agency or by both of them — on bank non-performing loans. Using a new database on supervisory governance in 116 countries from 1970 to 2016, it finds that supervisory governance per se does not significantly affect non-performing loans. However, it also finds that, where the risk of capture is high, shared supervision is associated with a significant reduction in non-performing loans. This is in line with the supervisory capture theory, whereby it is more costly to capture two supervisors rather than one. Overall, these results provide new evidence in support of the relevance of supervisory governance in hampering supervisory capture from the banking sector.