Should Banking Supervision and Monetary Policy Tasks be Given to Different Agencies?

Abstract

A relevant and current policy debate is whether banking supervision should be assigned to the same institution (the central bank) that is responsible for monetary policy. This paper reviews the theoretical arguments advanced in favour and against the solution of having banking supervision performed by the central bank. We then provide some additional evidence on the inflation performance of OECD countries whose banking systems are classified according to the regulatory regime in place. We find that the inflation rate is considerably higher and more volatile in countries where the central bank acts as a monopolist in banking supervision than in countries where this responsibility is assigned either to another agency or to more than one agency (possibly including the central bank). Finally, we compare banks' pricing behaviour and performance in the two groups of countries.