The Role of Legal Regulation in Banking Supervision. What system works best in a post financial crisis setting?

Abstract

The issues of regulation of banking supervision are usually the same in many financial systems. In most cases we have similar authorities and matching regulations to ensure that financial institutions and markets are safe and sound. In this paper I argue about the most appropriate way of structuring the financial regulatory authorities in a country following a comparative study of many different supervisory authorities. Indeed, this particular aspect has been sternly discussed recently due to the important legal as well as political issues involved. I shall focus my analysis on the legal subject matter based on experiences from countries in the European Union as well as best practices around the world. The paper will also take into account legal elements of banking supervision when a country reconsiders its banking supervision’s institutional set-up following a crisis. At first I shall define the alternatives for supervision that countries have opted for and then discuss how certain key legal aspects for supervision, such as independence, accountability, transparency and efficiency can be accommodated under various supervisory structures. Last, I shall put forth my arguments for and against having supervision incorporated in the executive or placed with a central bank and its legal implications, including an evaluation of the arguments for and against combining various supervisory authorities.