Banking Supervision Outsourcing: Economics, Rules and Drivers

What are the pros and cons of involving external auditors in banking supervision? Which are the concrete rules of the game all around the world? How to evaluate them? The aim of this paper is to shed light on the relationship between the quality of banking supervision and the involvement of external auditors, considering the potential benefits and costs. On the one side, the involvement of private financial gatekeepers can improve overall credibility of the supervisory setting. On the other side, the involvement of private actors for the implementation of public tasks can give rise to a range of known risks.The article opens with economic analysis highlighting the pros and cons of involving external auditors and entrusting them with a measure of banking supervision. On the basis of the economic framework, the author constructs an original and systematic index of Auditors’ Involvement in Supervision – the AIS Index – based on 22 indicators, which is then applied to evaluate country by country the state of banking supervision in the world. The resulting data set is used for econometric testing of the existence of drivers that can explain the political choices made over auditors’ involvement in supervision.