SHOULD THE FUNCTIONS OF MONETARY-POLICY AND BANKING SUPERVISION BE SEPARATED

The paper investigates whether monetary policy and banking supervision should be separated. The main argument for separation is that the com bination of functions might lead to a conflict of interest. An argumen t against is that separation is inconsistent with the central bank's c oncern for the systemic stability of the financial system. In a cross- country survey of 104 bank failures, we observe a trend towards using taxpayers' money for bank rescues which strengthens the case for hivin g off the supervisory function to a government agency. It would, howev er, be difficult to have a complete division, since the central bank g enerally remains the only source of immediate funding.