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Optimal Supervisory Architecture and Financial Integration in a Banking Union

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Abstract

Both in the United States and in the Euro Area, bank supervision is the joint responsibility of local and central supervisors. I study a model in which local supervisors do not internalize as many externalities as a central supervisor. Local supervisors are more lenient, but banks also have weaker incentives to hide information from them. These two forces can make a joint supervisory architecture optimal, with more weight put on centralized supervision when cross-border externalities are larger. Conversely, more centralized supervision endogenously encourages banks to integrate more cross-border. Due to this complementarity, the economy can be trapped in an equilibrium with both too little central supervision and too little financial integration, when a superior equilibrium would be achievable.
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hal-01941516 , version 1 (01-12-2018)

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  • HAL Id : hal-01941516 , version 1

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Jean-Edouard Colliard. Optimal Supervisory Architecture and Financial Integration in a Banking Union. 2017. ⟨hal-01941516⟩
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