External authorities in Banking Supervision: how does inflation targeting affect the decision?

External authorities in Banking Supervision: how does inflation targeting affect the decision? 1. Introduction Since the recent crisis has made clear the need for regulation restructuring, on the news it seemed to have become only a matter of when. Yet the reforms have not been produced as quickly as it was thought. The reasons that hamper such reforms are for sure due to political interest, but they also affect a technical area. The debate on which supervisory architectural model is best, indeed, is still going on and far to be solved. Empirical analysis does not seem to provide any strong suggestion whether one model should be better than another one. A great part of the debate is concerned on how much involvement should be assigned to Central Banks, and since the theoretical work does not come to a clear conclusion, one can focus on the concrete decisions of policy makers, in the attempt to extract a rationale from the supervisory structures in the real world. This work considers the agency problem as a driver in the decision, where the objective is to minimize diseconomies coming from informational asymmetries and the subsequent room for collusion. There is not much literature on this topic, but we can apply to the banking sector the hierarchical agency framework introduced by Kofman and Lawarrée (1993), which was designed for a corporate environment, but offers some ideas for what concerns the role of internal and external supervisors. Kofman and Lawarrée introduced a third player in the standard 2