Abstract
In this paper we use insights from organizational economics and financial regulation to study
the optimal architecture of supervision. We suggest that the new architecture should revolve
around the following principles: (i) banking, securities and insurance supervision should be
further integrated; (ii) macro prudential supervisory function must be in the hands of the
central bank; (iii) the relation between macro and micro supervisors must be articulated
through a management by exception system involving direct authority of the macro
supervisor over enforcement and allocation of tasks; (iv) given the difficulty of measuring
output on supervisory tasks, the systemic risk supervisor must necessarily be more
accountable and less independent than Central Banks are on their monetary task; (v) the
supervisory agency cannot rely on high powered incentives to motivate supervisors, and must
rely on culture instead; (vi) the supervisor must limit its reliance on self regulation; and (vii)
the international system should substitute the current loose, networked structure for a more
centralized and hierarchical one. Read the CEP paper
here.
