The Institutional Architecture of Financial Regulation and Supervision

This chapter looks at the institutional architecture of financial regulation and supervision from a theoretical and comparative perspective. It is structured as follows. The discussion begins with the significance of institutional design, the ‘fit’ between supervisory models and the existing supervisory structures, and the circumstances in which one structure may work better than others. The focus then shifts to the main supervisory models and the manner in which they allocate functions to one or more authorities. It will be seen that the choice of financial supervisory model is influenced by various factors, and that it entails, in principle, different benefits and challenges. We then turn to consider the role accorded to central banks in financial supervision, which is a key feature of any financial supervisory architecture; as well as other functions for supervisory authorities, whether these are accorded to central banks or separate supervisory agencies. The penultimate section of this chapter focuses on the accountability of financial supervisors, which is very much affected by the institutional choices adumbrated above. It will be concluded that, although there is no ‘silver bullet’ for an ideal architecture of financial sector oversight, institutional design matters - even if only to an extent - to supervisory efficiency, effectiveness, and accountability.