The question of who should regulate banks is certainly one for debate, there are many arguments for and against and with their being no concrete answer to which system is best, it is clear that an appropriate combination of theory and fact should be used to help point us in towards a conclusive answer.
The issue here is whether or not a bank should be regulated by a central bank or by an independent regulator. For many years bank regulation in the United Kingdom
There are a number of arguments supporting an institution with operational independence. There is no conflict of interests with regard to other targets having to be met and this allows the institution to regulate other financial service providers. There are however a number of, in my opinion, key disadvantages to having an independent regulator. In terms of a systemic view, they would simply view a bank, as an institution and maybe not take into consideration an economy wide view point. They also would lack the key informational advantage which is seen by a central bank and finally not having to “pay” the consequences of poor decision making removes the incentive mentioned above.
In my opinion, the regulator should always be the central bank, if only for the simple reason that it holds superior information to any other institution. Professor Marc Lavoie (2006) states that independent regulators “favour the interest of a privileged minority at the expense of the greater public good”, an idea I certainly agree with. For example, if the FSA were required by state to provide the funding to rescue RBS, would they have acted differently……I think so.
Thanks for Reading
Take Care
PN
Reference:
http://www.progressive-economics.ca/wp-content/uploads/2007/07/zacharie.pdf
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