Entrusting central banks with microprudential supervision: implications for financial stability

In an attempt to address the effectiveness of prudential oversight after the global financial crisis, many countries made significant, radical in some cases, changes in their microprudential supervisory structures—often accompanied by extensive consultation with stakeholders. The majority gave more responsibility to central banks. The crisis underscored important coordination benefits of having the microprudential supervision under the roof of central banks for systemic risk management, crisis preparedness, and crisis resolution. Recent empirical research, yet limited, shows that the central bank involvement in microprudential supervision improves bank soundness and has a mitigating effect on systemic risk. More effort is still needed towards clear objectives, resources, and robust governance frameworks for microprudential supervision regardless of its location, within or outside the central bank.