This paper presents a model in which a central and a local supervisor contribute
their efforts to obtain information on the solvency of a local bank, which is
then used by the central supervisor to decide on its early liquidation. This hierarchical
model is contrasted with the alternatives of decentralized and centralized supervision,
where only the local or the central supervisor collects information and decides on
liquidation. The local supervisor has a higher bias against liquidation (supervisory
capture) and a lower cost of getting local information (proximity). Hierarchical supervision
is the optimal institutional design when the bias of the local supervisor is high
but not too high and the costs of getting local information from the center are low but
not too low. With low (high) bias and high (low) cost it is better to concentrate all
responsibilities in the local (central) supervisor.

• Hierarchical bank supervision