The Economic Crisis: A Story of Supervisory Failure and Ideas for the Way Forward

Chapter 3, “The economic crisis: a story of supervisory failure and ideas for the way forward” by Donato Masciandaro, Bocconi University, Marc Quintyn, IMF Institute, and Rosaria Vega-Pansini, Bocconi University, contains a detailed description of the failures in many supervisory systems in the run-up to the recent financial crisis. The authors give a systematic analysis of the impact of two key features of the supervisory architecture – consolidation and quality of governance – and come to the conclusion that both were negatively correlated with economic resilience. Also central bank involvement in supervision did not seem to matter. After pointing out the limitations of the governance arrangements and using a new distinction between macro and micro prudential surveillance, the authors suggest that supervision be assigned to two separate institutions (macro vs. micro) rather than a single integrated agency so that checks and balances, as a complement to governance, rather than consolidation, can assist in reducing the possibility of failure.