Allocating Lending of Last Resort and Supervision in the Euro Area

The Maastricht Treaty created the European System of Central Banks and the European Central Bank (ECB) to head the system. The treaty entrusts the ECB with the responsibility for monetary policy, but national authorities remain responsible for financial stability. In this chapter, we focus on the implications of national versus central assignment of lender-of-lastresort and supervisory functions for the degree of forbearance in closing distressed banks and for the level of diligence in bank supervision. One major conclusion is that, if only one of the two functions is centralized, then it will be more effective to centralize the supervisory function.