Working Paper: NBER ID: w20844
Authors: Gianni Toniolo; Eugene N. White
Abstract: We investigate the origins and growth of the Financial Stability Mandate (FSM) to examine why bank supervisors, inside and outside of central banks succeeded or failed to meet their FSM. Three issues inform this study: (1) what drives changes in the FSM, (2) whether supervision should be conducted within the central bank or in independent agencies and (3) whether supervision should be rules- or discretion/principles-based. As histories of bank supervision are few, we focus on the history of six countries where there is sufficient information, three in Europe (England, France, and Italy) and three in the New World (U.S., Canada, and Colombia) to highlight the essential developments in the FSM. While there was a common evolutionary path, the development of FSM in each individual country was determined by how quickly each adapted to changes in the technology of the means of payment and their political economy, including their disposition towards competitive markets and openness to the world economy.
Keywords: Financial Stability Mandate; Bank Supervision; Central Banks; Regulatory Frameworks
JEL Codes: E58; G21; N1; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Effectiveness of supervision contingent upon regulatory structure (G18) | Financial instability (F65) |
| Flawed regulatory framework (G28) | Ineffective supervision (I24) |
| Ineffective supervision (I24) | Increased financial instability (F65) |
| Inadequate regulatory responses during crises (H12) | Panic and instability in financial systems (F65) |
| Shift from rules-based supervision to discretionary approach (G28) | Moral hazard (G52) |
| Discretionary actions by supervisors (M54) | Unintended consequences (D62) |
| Growth of deposit banking (G21) | New challenges for FSM (F53) |
| Reliance on deposits (G21) | Complexity of ensuring financial stability (G28) |
| Traditional approaches to supervision (Y80) | Inadequate financial stability measures (F65) |