The Principle of Cost-Based Supervision in Practice

A key response of financial regulators around the world to the financial and economic crises of ten years ago has been the formation of supervisory committees. Such committees now exist in several countries worldwide. Consequently, many regulators fund their supervisory function by charging their supervisees. The objective of this paper is to compare how these regulators charge fees, identify common practices, draw conclusion from observations, and provide relevant recommendations. This paper especially focuses on the Federal Reserve, the European Central Bank and the Bank of England that charge fees just enough to recover the cost of supervisory function, or those that follow what this paper refers to as the “principle of cost-based supervision.” A discussion on how selected examples of regulators practice the principle of cost-based supervision follows. Simulations of fees using selected procedures to supervisees in the Czech Republic and Greece follow. Then this paper introduces the asset elasticity of cost notated as n and simulates the hypothetical supervisory fee if n is constant.