Regulatory capture and banking supervision reform

We analyze whether banking supervision responsibilities should be concentrated in the hands of a single supervisor. We find that splitting supervisory powers among different supervisors is a superior arrangement in terms of social welfare to concentrating them in a single supervisor when the capture of supervisors by bankers is a concern. This result has implications for the design of banking supervisory architecture and informs current reform efforts in this field.

► We model banking supervision under the threat of capture by bankers. ► We study whether supervisory powers should be concentrated in a single supervisor. ► Concentration increases the likelihood of capture of the supervisor by bankers. ► Splitting supervisory powers is a superior arrangement in terms of social welfare. ► We provide a rationale for reconsidering the current trend toward concentration.