Pick your poison: Banking regulations, macroeconomic management, and moral hazard in OECD economies

This paper argues that banks operating in systems where monetary and regulatory authority are unified in a central bank expect and receive preferential policies, and so act less prudently than do banks in other systems. This moral hazard arises when the natural tension between counter-cyclical monetary policy and pro-cyclical regulatory policy is relaxed. I test the hypothesis using a time series cross-sectional econometric analysis of OECD countries from 1990-2007. The results strongly support the claim that there is a relationship between prudential behaviors of banks and the location of regulatory authority, and provides evidence that moral hazard exists when regulatory and monetary authority are unified. I conclude by discussing the implications of the analysis for governance at the domestic and international levels.