competent authorities in the field of prudential supervision of banks and the
stability of the financial system, and (2) to provide a multilateral forum for
the exchange of information and cooperation between banking supervisors
of different member states. The BAC is based at the European Commission
and promotes cooperation between the Eurosystem and banking supervisory
authorities.
Although there are certainly many strong points in favor of each insti-
tution, I argue in favor of the BSC as location of the new ”Supervisory
Coordination Authority”. Firstly, in contrast to the Groupe de Contact, it is
based on EU legislation and already reflects a minimum consensus among na-
tional banking supervisors. Secondly, although both the BSC and the BAC
promote cooperation between the Eurosystem and national supervisors, the
BSC additionally deals with market and regulatory developments which are
of importance for the EMU banking system. Besides, the BSC’s experience
with the preparation of national banking legislation argues for its role in the
diffusion of sound supervisory practices.15
7 Conclusion
In this paper, I show how a supervisor should optimally employ risk-adjusted
capital-asset ratios to maximize social welfare. The supervisory authority is
concerned with the costs of bank failure which accrue in the form of losses to
depositors and negative repercussions on other banks and the whole economy.
In the integrated EU banking system, a bank breakdown in one country will
trigger some of these costs in another country. With a national mandate, su-
pervisors do not take these spillovers into account. From an EU perspective,
supervision will not be optimal as the probability of bank failure will be too
high throughout Europe.
I argue that the current bilateral cooperation in the form of Memoranda
of Understanding is not able to eliminate the supervisory incentive deficit.
Further tightening of coordination is needed in order to make supervisors con-
sider international spillovers. I argue in favor of transforming the ECB-based
Banking Supervision Committee into a ”Supervisory Coordination Author-
ity” to which national supervisors are accountable.
15I do not argue for or against allocating supervision with the central bank. If the
BSC got the supervisory mandate, it could then also be outsourced to an independent
institution. See, for instance, Goodhart and Schoenmaker (1993), Goodhart and Schoen-
maker (1995), Haubrich (1996), Peek, Rosengren, and Tootell (1999), Goodhart (2000),
and Barth et al. (2001) for the debate on whether the monetary policy mandate should be
separated from the supervisory mandate. Hawkesby (2001) includes cost-benefit elements
and country-specific factors into the discussion.
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