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Supervisory Governance, Capture and Non-Performing Loans

Nicolò Fraccaroli ()

No 471, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: Supervisory governance is believed to affect financial stability. While the literature has identified pros and cons of having a central bank or a separate agency responsible for microprudential banking supervision, the advantages of having this task shared by both institutions have received considerably less attention in the literature. Shared supervision has however inherent benefits for the stability of the banking system, as it increases the costs of supervisory capture: capturing a single supervisor, be it the central bank or an agency, has in fact lower costs than capturing two. Nevertheless, while this argument has been proposed theoretically, it has never been tested empirically. This paper fills this void introducing a new dataset on the supervisory governance of 116 countries from 1970 to 2016. It finds that, while nonperforming loans are not significantly affected by supervisory governance per se, they are significantly lower in countries where supervision is shared and the risk of capture is high. This last result, which is robust to a number of controls and robustness checks, proves new evidence in support of the detrimental impact of shared supervision on supervisory capture.

Keywords: banking supervision; supervisory capture; NPLs (search for similar items in EconPapers)
JEL-codes: G18 G38 E58 P16 D73 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2019-10-08, Revised 2019-10-08
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
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