TY - JOUR
T1 - Allocating bank regulatory powers
T2 - Lender of last resort, deposit insurance and supervision
AU - Kahn, Charles M.
AU - Santos, João A.C.
N1 - Funding Information:
The authors thank two anonymous referees, the editor Xavier Vives, Claudio Borio, Mark Carey, Xavier Freixas, Charles Kramer, Kostas Tsatsaronis, Jim Wilcox, and seminar participants at Banco de Portugal, Sveriges Riksbank, Bank for International Settlements, Federal Reserve Bank of New York, Bank of Japan, IMF; the 2001 Federal Reserve Bank of Chicago Bank Structure Conference, EFA and FMA meetings; and the 2002 AFA/NAEFA and WFA meetings for useful comments. Some of the work for this project was done while Santos was at the Bank for International Settlements. Kahn thanks the Bank for International Settlements for financial support. The views stated herein are those of the authors and are not necessarily those of the Bank for International Settlements, the Federal Reserve Bank of New York or the Federal Reserve System.
PY - 2005/11
Y1 - 2005/11
N2 - We examine the optimal institutional allocation of bank regulation. We find that centralizing the lending of last resort and deposit insurance functions in a regulator leads to excessive forbearance. It also leads the bank to invest suboptimally in loans. Giving this regulator supervision improves on both problems, but it still does not lead to the efficient outcome. In the multi-regulator arrangement, we find that it is beneficial to give supervision to the deposit insurer. The choice between the unified-regulator arrangement and the multi-regulator arrangement involves a trade-off: The multi-regulator arrangement reduces the forbearance problem at high levels of liquidity shortage but may exacerbate it at low levels. These results assume the absence of information frictions. When banks are better informed than regulators, we show that regulators may have an incentive not to share private information, suggesting it is important to consider regulators' informational advantages when deciding on the allocation of regulation.
AB - We examine the optimal institutional allocation of bank regulation. We find that centralizing the lending of last resort and deposit insurance functions in a regulator leads to excessive forbearance. It also leads the bank to invest suboptimally in loans. Giving this regulator supervision improves on both problems, but it still does not lead to the efficient outcome. In the multi-regulator arrangement, we find that it is beneficial to give supervision to the deposit insurer. The choice between the unified-regulator arrangement and the multi-regulator arrangement involves a trade-off: The multi-regulator arrangement reduces the forbearance problem at high levels of liquidity shortage but may exacerbate it at low levels. These results assume the absence of information frictions. When banks are better informed than regulators, we show that regulators may have an incentive not to share private information, suggesting it is important to consider regulators' informational advantages when deciding on the allocation of regulation.
KW - Bank regulation and supervision
KW - Deposit insurance
KW - Lender of last resort
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U2 - 10.1016/j.euroecorev.2004.10.004
DO - 10.1016/j.euroecorev.2004.10.004
M3 - Article
AN - SCOPUS:27144543182
VL - 49
SP - 2107
EP - 2136
JO - European Economic Review
JF - European Economic Review
SN - 0014-2921
IS - 8
ER -