The Organisational Structure of Banking Supervision

FSI Occasional Papers No. 1 ? November 2000-10-25

The Organisational Structure of Banking Supervision

by Prof. C.A.E. Goodhart

Financial Stability Institute Bank for International Settlements

Basel, Switzerland

Charles Goodhart, CBE, FBA is the Norman Sosnow Professor of Banking and Finance at the London School of Economics (LSE). Before joining the LSE in 1985, he worked at the Bank of England for seventeen years as a monetary adviser, becoming a Chief Adviser in 1980. In 1997 he was appointed one of the outside independent members of the Bank of England's new Monetary Policy Committee until May 2000. Earlier he had taught at Cambridge and LSE. Besides numerous articles, he has written a couple of books on monetary history, and a graduate monetary textbook, Money, Information and Uncertainty (2nd Ed. 1989); and has published two collections of papers on monetary policy, Monetary Theory and Practice (1984) and The Central Bank and The Financial System (1995); and an institutional study of The Evolution of Central Banks, revised and republished (MIT Press) in 1988.

Contents

The Organisational Structure of Banking Supervision

Foreword

v

Abstract

vii

I. Introduction

1

II. Arguments for Separation

8

III. Arguments for Unification

24

IV. Are the Issues the Same in Emerging Countries?

34

V. Conclusions

43

Bibliography

45

Foreword

It gives me great pleasure to present this first in a series of occasional papers published by the Financial Stability Institute. The purpose of these papers is to create awareness of, and provide information on, topics of interest to financial supervisors. For this first paper the Financial Stability Institute requested Professor Charles Goodhart (London School of Economics) to write about banking supervision and its relationship to central banks. Traditionally, it has been considered ideal to place banking supervision under the umbrella of central banks because this function is key to the conduct of monetary policy and financial stability oversight. Recently, many countries around the world have been moving banking supervision outside their central banks. What are the advantages and disadvantages of this policy decision? Professor Charles Goodhart addresses this question. Furthermore, an important contribution of his work is to focus this issue from the point of view of emerging-market countries. We present this work with the hope that it will provide policy makers with key factors they should take into consideration in the design of the most appropriate structure of their supervisory systems.

John G. Heimann Chairman Financial Stability Institute November 2000

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