Financial supervision structure, decentralized decision-making and financing constraints

Abstract

The paper uses firm-level data to explore the impact of financial supervision structure on firms’ financing constraints in 48 developing countries. Financing constraints reflect survey-based information provided by firms. The financial supervision structure reflects the national choice among an integrated, sectoral or twin-peak model of supervision with or without a supervisory role for the central bank. We order the supervisory structure in accordance with its degree of decentralization in decision-making. A key novelty of the analysis is the calculation of separate measures of prudential supervision and conduct of business supervision. These measures emphasize different areas and goals of intervention. The analysis uses firm, sector and country-level information and includes several sensitivity and endogeneity tests. The results show that decentralized structures of prudential supervision are associated with more binding financing constraints of firms in high-income developing countries and less binding ones in market-based financial systems. Their effect on low-income countries and bank-based systems is weak. In contrast, decentralized structures of conduct of business supervision are associated with more binding financing constraints of firms in high-income countries and in both bank-based and market-based financial systems. The impact of supervision structure varies with firm size and sector of activity and it is mitigated by country-level factors that reflect a country's macroeconomic conditions, the role of public governance institutions and the authority and mandate of the central bank.