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Elena Carletti warns of “agency problem” for new Banking Union

Pan-European banking regulation could lead to an “agency problem” if the priorities of national central banks and the central supervisor diverge, according to Professor Elena Carletti.

 Carletti, who is a  Professor of Finance at Bocconi University and the scientific director of the Florence School of Banking and Finance, appeared to warn of a flaw in the architecture of the new Banking Union caused by a potential conflict interests at the national level.

“The rules are in the hands of the central supervisor”, explained Carletti. “The problem is that in order to be able to implement those rules  the central supervisor needs information.”

“It needs to know which banks are taking too much risk, for example. Do to that they have to rely on the inspections and the information that the local supervisors know about their own banks, even if the decisions are taken by the central supervisor. This flow of information is very delicate if the two supervisors have different interests.”

Carletti, who was speaking to the VoxViews YouTube channel at the EPR Financial Regulation Initiative Conference in London, went on to suggest the possibility of “conflicting objectives” between regulators. Local supervisors, she speculated, may try to “unravel or prevent some action by the central supervisor”, possibly by withholding important information. 

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