Who Pays for Banking Supervision? Principles, Practices, and Determinants

Abstract

This paper is focused on the economics of financing banking supervision. Two questions are investigated: What are the most common financing practices? Can we explain differences in current financing practices by country specific factors, using a path dependence approach? Given a sample of 90 banking supervisors (central banks and financial authorities), we perform an empirical analysis that identifies the determinants of the financing structure of banks' prudential supervision. First, the financing rule is a function of the type of supervisory authority: if the supervisor is a central bank the public funding is more likely to occur, while the probability of a supervision funded via a levy on the regulated banks is higher if the supervisor is a financial authority. Secondly, the financing rule depends on the structure of the financial systems. In the bank oriented systems, the public funding is more likely to occur. Finally the geographical factor is also significant: European countries seem to be more oriented towards the private funding regime. In general we do not find evidence of the role of the political factor, the economy's size or the level of development and legal tradition.

Keywords: banking supervision, budgetary independence, accountability, financial governance, central banks, financial authorities

JEL Classification: D78, G21, G28, O17, P16