1. Análisis normativo de la estructura de gobierno de los supervisores.

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A Normative Analysis of Banking Supervision:

Independence, Legal Protection and

Accountability

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Motivation

Growing interest on the institutional organization of banking supervision:

I Basel Committee on Banking Supervision’s (1997, 2006) Core Principles, Goodhart (1998, 2007), Lastra (1996), Masciandaro and Quintyn (2007, 2009), Quintyn and Taylor (2003), Rochet (2008)

Non-appropriate institutional arrangements:

I Subprime crisis, Quintyn, Ramirez and Taylor (2007)

Non-conclusive empirical evidence:

I Das, Quintyn and Chenard (2004): positive significant effects

I Barth, Caprio and Levine (2004, 2006): non-significant effects

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Objectives

Which are the characteristics that a supervisory arrangement should have to effectively implement a supervisory policy?

This paper:

I Provides a formal model of a bank supervisor

I Derives policy implications

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The Model: Agents, Technologies and Preferences

A risk neutral banker:

invests (fully insured) deposits(D=1)on risky loans

Ru >Rm>1>Rd=0 at maturity;Rl<1 before maturity decides whether or not to take excessive risks

A risk neutral bank supervisor:

has authority to gather information and to close down banks

if effort, gets hard information with probabilityµ

receives a powerful incentive scheme:S =w−p(w+c)

Politicians:

the executive branch of the government

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The Model: Agents, Technologies and Preferences

A risk neutral banker:

A risk neutral bank supervisor:

Politicians:

the executive branch of the government

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The Model: Agents, Technologies and Preferences

A risk neutral banker:

A risk neutral bank supervisor:

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The Model: Timing

1 _Investment_{: risk taking decision}

2 _{Information gathering}_{: by shirking, supervisor gets}_B

3 _Capture_{: a side-contract gives the supervisor}_b

4 _{Closure decision}_:

I _{Political independence: bank supervisor decides}

I _{Political control: politicians decide}

5 _Returns_{: loans pay off}

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Benchmark: The First-best Outcome

Expected Social Welfare:

W =π−

θd+1{risk−taking}β

f

First-best Outcome:

Banker abstains from taking excessive risks

Implementation:

Commit to:

gather information

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Benchmark: The First-best Outcome

Expected Social Welfare:

W =π−

θd+1{risk−taking}β

f

First-best Outcome:

Banker abstains from taking excessive risks

Implementation:

Commit to:

gather information

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The Problem of the Social Planner

To give incentives to the bank supervisor in order he:

I _{gathers information}

I _{closes down excessively risky banks}

Normative viewpoint:

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Key Elements: Political Independence

Assume:

political control

politicians receive evidence that the bank is excessively risky

Politicians’ Dynamic Commitment Problem:

Wrisk−taking− Wclosure = [π−(θd+β)f]−[Rl−1−f]>0

Result:

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Key Elements: Political Independence

Assume:

political control

politicians receive evidence that the bank is excessively risky

Politicians’ Dynamic Commitment Problem:

Wrisk−taking− Wclosure = [π−(θd+β)f]−[Rl−1−f]>0

Result:

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Key Elements: Accountability Arrangements

Accountability:

justify actions and be responsible:p>0

Assume:

political independence

no accountability:p=0

Bank Supervisor Shirks and Blackmails Bankers:

S |p=0=w

Result:

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Key Elements: Accountability Arrangements

Accountability:

justify actions and be responsible:p>0

Assume:

political independence

no accountability:p=0

Bank Supervisor Shirks and Blackmails Bankers:

S |p=0=w

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Key Elements: Legal Protection

Legal Protection:

no punishment if closes down an excessively risky bank:p=0

Assume:

political independence, accountability and hard information

no legal protection:

I _p₁>0 if closes the bank down and shows information

I _p₂>p1otherwise

There is Scope for Capture:

S |p2 +b≥ S |p1 if p1≥p2−

b w+c

Result:

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Key Elements: Legal Protection

Legal Protection:

no punishment if closes down an excessively risky bank:p=0

Assume:

political independence, accountability and hard information

no legal protection:

I _p₁>0 if closes the bank down and shows information

I _p₂>p1otherwise

There is Scope for Capture:

S |p2+b≥ S |p1 if p1≥p2−

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The Optimal Incentive Scheme:

{

w

∗

,

p

∗

}

Supervisor: exerts effort shirks µ

1−µ

Supervisor: gets hard information gets no information shows hides Judge: gets hard information gets no information Judge: observes right closure decision observes wrong closure decision cannot verify

p∗(observes right closure decision) =0

p∗(observes wrong closure decision) =1

p∗(cannot verify)>0

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The Optimal Incentive Scheme:

{

w

∗

,

p

∗

}

1−µ

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The Optimal Incentive Scheme:

{

w

∗

,

p

∗

}

1−µ

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The Optimal Incentive Scheme:

{

w

∗

,

p

∗

}

1−µ

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Policy Implications from the Optimal Incentive

Scheme

{

w

∗

,

p

∗

}

w∗>0

right closure decision = gather and show information, and close down risky banks

p∗(cannot verify or observes wrong closure decision)>0

Policy Implications

The optimal incentive scheme can be implemented by a Bank Supervisor’s Charter Law or Statute, that:

providespolitical independencefor the bank supervisor

provideslegal protectionfor the bank supervisor

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Policy Implications from the Optimal Incentive

Scheme

{

w

∗

,

p

∗

}

w∗>0

Policy Implications

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Policy Implications from the Optimal Incentive

Scheme

{

w

∗

,

p

∗

}

w∗>0

Policy Implications

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Empirical Strategy

Pr(bank loans default) =

(

θf +β if excessive risk-taking θf otherwise

Cross-country linear regression model:

NPLi=a1+a2×CP1i+ei

Identification:

IfE(CP1,e) =0 andVar(CP1)6=0, then

θf =a1+a2andβ=−a2

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OLS Results

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(2) (3) (4)

CP1 (a2=−β) -7.385*** (0.000) Independence -4.191* (0.081) Legal -7.716*** Protection (0.000) Accountability -7.693*** (0.007)

Constant (a1=θf+β) 10.656***

11.837*** 12.194*** 12.867***

(0.000)

(0.000) (0.000) (0.000)

N 43

71 59 50

AdjustedR2 _0.356

0.040 0.263 0.199

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OLS Results

(1) (2) (3) (4) CP1 (a2=−β) -7.385***

(0.000)

Independence -4.191* (0.081)

Legal -7.716***

Protection (0.000)

Accountability -7.693***

(0.007) Constant (a1=θf+β) 10.656*** 11.837*** 12.194*** 12.867***

(0.000) (0.000) (0.000) (0.000)

N 43 71 59 50

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Robustness Checks

Different construction ofCP1

Statutory information

Control variables (exogenous determinants)

I macroeconomic factors

(short-term interest rate, government’s fiscal deficit, inflation rate, GDP growth rate, GDP per capita)

I institutional, regulatory and governance environment

I structure of the banking system

(state-owned banks’ market share, concentration)

I historical determinants

Instrumental variables

I _{measurement error problem}

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Final Remarks

Political independence, legal protection and accountability arrangements are necessary

These arrangements reduce the ratio of NPL from 10 % to 3 %

Legal protection and accountability are the key elements

No independent supervisors: 30 %

No accountable supervisors: 30 %

No legally protected supervisors: 50 %

Final Remark

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Final Remarks

Final Remark

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