Divide et impera: Financial supervision unification and central bank fragmentation effect

This paper analyses how the role of the central bank can influence the unification of the overall financial supervision architecture. We claim that the policymaker's choices can be viewed as a sequential process in which the institutional status quo matters. The degree of unification in supervision is decided based on the position of the central bank. If the central bank involvement in supervision and its reputation are high, the unification level is likely to be low, and vice versa. The central bank fragmentation effect can be explained through the three possible channels of moral hazard, bureaucracy, and reputation endowment effects. The empirical analysis-performed with ordered logit and probit functions on a dataset of 89 countries-confirms the robustness of the central bank fragmentation effect.