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Towards a New Architecture for Financial Stability: Seven Principles

Luis Garicano () and Rosa Lastra

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: In this paper we use insights from organizational economics and financial regulation to study the optimal architecture of supervision. We suggest that the new architecture should revolve around the following principles: (i) banking, securities and insurance supervision should be further integrated; (ii) 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 for a more centralized and hierarchical one.

Keywords: Banks; international financial markets; systematic risk (search for similar items in EconPapers)
JEL-codes: E61 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-reg
Date: 2010-07
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http://cep.lse.ac.uk/pubs/download/dp0990.pdf (application/pdf)

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Journal Article: Towards a New Architecture for Financial Stability: Seven Principles (2010) Downloads
Working Paper: Towards a new architecture for financial stability: seven principles (2010) Downloads
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