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Towards a new architecture for financial stability: seven principles

Luis Garicano () and Rosa Lastra

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this paper we use insights from organizational economics and financial regulation to studythe optimal architecture of supervision. We suggest that the new architecture should revolvearound the following principles: (i) banking, securities and insurance supervision should befurther integrated; (ii) macro prudential supervisory function must be in the hands of thecentral bank; (iii) the relation between macro and micro supervisors must be articulatedthrough a management by exception system involving direct authority of the macrosupervisor over enforcement and allocation of tasks; (iv) given the difficulty of measuringoutput on supervisory tasks, the systemic risk supervisor must necessarily be moreaccountable and less independent than Central Banks are on their monetary task; (v) thesupervisory agency cannot rely on high powered incentives to motivate supervisors, and mustrely 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 morecentralized 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)
Date: 2010-07
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http://eprints.lse.ac.uk/48900/ Open access version. (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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