Who pays for banking supervision? Principles and practices

This paper focuses on the financing of banking supervision. Countries are classified according to who finances banking supervision the tax payer and/or the supervised industry -, and how the budget and fees are determined. We show that funding regimes differ across countries. Public funding is more often found when banks are supervised by the central bank, while supervision funded via a levy on the regulated banks is more likely in the case of a separate financial authority. Finally, some countries apply mixed funding. In general, there is a trend toward more private funding. We also find a relation between sources of financing and accountability arrangements. Public financing is associated with accountability towards the parliament, while private financing is more likely to go hand in hand with accountability towards the government. The financing issue is important because the financing regime may affect the behaviour of the supervisor and hence the quality of supervision. Regulatory capture, industry capture and the supervisor's self interest may affect supervisory policy. No theoretical model has been developed prescribing the optimal financing of supervision. Our results suggest that the actual choice of financing is a casual one, not based on either considerations of incentive-compatability or on the beneficiary approach. As it is to be expected that financial regulation will become more internationally organized in the future, careful analysis of the financing issue will become even more relevant.