Central Banks' Role in Bank Supervision in the United States and United Kingdom

Abstract

Driven in part by the question of bank supervision in euro-area countries, a growing body of literature addresses whether central banking and bank supervision should be combined. This paper address this debate in light of recent legislation in the United Kingdom and the United States. Recent legislation in the United Kingdom stripped the Bank of England of its responsibility for bank supervision and established the Financial Services Authority as an integrated supervisor of financial services. In the United States, the Gramm-Leach-Bliley Act of 1999 expanded the regulatory authority of the Federal Reserve. In light of international trends, I consider how the separation of monetary policy and bank supervision in the United Kingdom versus the combination of those functions in the United States stacks up against the empirical and theoretical literature. I conclude that the approaches in both countries rely on untested elements. I make predictions for the future role of the central banks in the United States and United Kingdom and some recommendations for reform.

JEL Classification: G2