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Optimal supervisory architecture and financial integration in a banking union

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  • Colliard, Jean-Edouard

Abstract

Both in the United States and in the Euro area, bank supervision is the joint responsibility of local and central/federal supervisors. I study how such a system can optimally balance the lower inspection costs of local supervisors with the ability of the central level to internalize cross-border or interstate externalities. The model predicts that centralised supervision endogenously increases market integration and cross-border externalities, further strengthening the need for centralised supervision. This complementarity implies that, for some parameterizations of the model, the economy can be trapped in a local supervision equilibrium with low supervision and integration. In such a case, the forward-looking introduction of a centralized supervisory architecture achieves a superior equilibrium. JEL Classification: D53, G21, G28, G33, G38, L51

Suggested Citation

  • Colliard, Jean-Edouard, 2015. "Optimal supervisory architecture and financial integration in a banking union," Working Paper Series 1786, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20151786
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    Keywords

    banking union; bank supervision; financial integration; regulatory federalism; single supervisory mechanism;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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