Towards a new Architecture for Financial Stability: Seven Principles

In this paper we use insights from organizational economics and financialregulation to study the optimal architecture of supervision. We suggest that thenew architecture should revolve around the following principles: (i) banking,securities and insurance supervision should be further integrated; (ii) the macroprudential supervisory function must be in the hands of the central bank; (iii) therelation between macro and micro supervisors must be articulated through amanagement by exception system involving direct authority of the macrosupervisor over enforcement and allocation of tasks; (iv) given the difficulty ofmeasuring output on supervisory tasks, the systemic risk supervisor mustnecessarily be more accountable and less independent than Central Banks are ontheir monetary task; (v) the supervisory agency cannot rely on high poweredincentives to motivate supervisors, and must rely on culture instead; (vi) thesupervisor must limit its reliance on self regulation; and (vii) the internationalsystem should substitute the current loose, networked structure for a morecentralized and hierarchical one.[...]