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Banking Supervision and External Autditors: What works best?

Donato Masciandaro and Davide Romelli ()

No 1746, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: What are the pros and cons of involving external auditors in banking supervision? This paper investigates the relationship between banking supervision and the involvement of external auditors from a theoretical and empirical perspective. We first provide a simple principal-agent framework that highlights the importance of several country-specific institutional characteristics in determining an optimal level of involvement of external auditors in banking supervision. We then propose a new index that captures the degree of involvement of external auditors in financial sector supervision. We construct this index for a broad set of 142 countries and show that countries characterized by higher levels of auditor involvement in supervision are less likely to experience a financial crisis. These results provide new and original empirical evidence on the link between regulatory and supervisory institutional designs and the probability of financial distress.

Keywords: Banking Supervision; Auditing; Delegation; Economics and Law (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc and nep-ban
Date: 2017
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