Towards a New Architecture for Financial Stability: Seven Principles

Luis Garicano and Rosa M. Lastra

Journal of International Economic Law, 2010, vol. 13, issue 3, 597-621

Abstract: This article uses insights from organizational economics and financial regulation to study the optimal architecture of supervision. It suggests that the new architecture should revolve around the following principles: (i) banking, securities and insurance supervision should be further integrated; (ii) the 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 with a more centralized and hierarchical one. Oxford University Press 2010, all rights reserved, Oxford University Press.

Date: 2010
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Working Paper: Towards a new architecture for financial stability: seven principles (2010)
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