Regulatory and Supervisory Independence and Financial Stability

Despite its importance, the issue of financial sector regulatory and supervisory independence (RSI) has received only marginal attention in literature and practice. However, experience has demonstrated that improper supervisory arrangements have contributed significantly to the deepening of several recent systemic banking crises. In this paper we argue that RSI is important for financial stability for the same reasons that central bank independence is important for monetary stability. The paper lays out four key dimensions of RSI-regulatory, supervisory, institutional and budgetary-and discusses ways to achieve them. We also discuss institutional arrangements needed to make independence work in practice. The key issue in this respect is that agency independence and accountability need to go hand in hand. The paper discusses a number of accountability arrangements.

Building Supervisory Structures in Sub-Saharan Africa

Current trends in financial sector development in sub-Saharan Africa are prompting policymakers to focus on the design of appropriate supervisory structures. Against the backdrop of worldwide efforts to remodel supervisory structures, this paper develops an analytical framework for designing a regulatory strategy that could assist in prioritizing the needs for regulation and supervision over time. Such a strategy should facilitate the design of a supervisory structure suitable for an individual country''s current and future needs. The paper emphasizes that in the case of sub-Saharan Africa, any such strategy is constrained by the reality of capacity limitations and should take into account the need to keep the central bank involved in the process. Building on the framework, the paper identifies a number of supervisory structures that could meet sub-Saharan Africa''s needs.Bank supervision;Financial sector;Absorptive capacity;central bank, monetary fund, monetary policy, reserve bank, central banks, monetary union, monetary authority, hong kong monetary authority

The Fear of Freedom

Compared with the case of central bank independence, independence for financial sector supervisors remains more controversial. This paper analyzes changes in independence and accountability arrangements in a set of 32 countries that overhauled their legal and/or institutional frameworks for supervision in recent years. Despite improvements, there is strong evidence that the endorsement of independence remains half-hearted, which shows itself through either overcompensation on the accountability side, or resort to political control mechanisms. The latter could potentially undermine the agency''s credibility. The results indicate that policymakers still need to be persuaded of the long-term benefits of independence for financial sector soundness, and of the potential for a virtuous interaction between independence and accountability, if the arrangements are well-designed.Bank supervision;Financial sector;banking, banking supervision, supervisory agency, central banking, bank independence, financial sector supervisors, financial regulation, supervisory agencies, bank of england, bank indonesia, banking crisis, financial sector supervision, supervisory process, financial supervision, banking system, good faith, financial accountability, bankers, internal audit, bank supervisors, supervisory authority, prudential regulation, banking crises, international standards, supervisory frameworks, banking publications, banking regulation, bank of canada, bank transparency, institutional underpinnings, integrated supervision, supervisory framework, monetary authority, bank laws, bank supervisor, bank insolvency, bank data, deposit insurance, prudential bank supervision, securities regulators, regulatory authority, banking law, recapitalization, market infrastructure, securities markets, bank for international settlements, bank failures, supervisory arrangements, connected lending, integrated regulation, banking industry, banking policy, judicial authority, insurance supervisors

Inside and outside the central bank: independence and accountability in financial supervision: trends, and determinants

This paper analyzes recent trends in, and determinants of, financial supervisory governance inside and outside central banks. We first review the case for supervisory independence and accountability in order to frame the econometric work on their determinants. We then calculate the levels of supervisory independence and accountability in 55 countries, disentangling similarities and differences among central banks and pure financial supervisors. The empirical analysis of the determinants indicates that the quality of public sector governance plays a decisive role in establishing accountability arrangements, more than independence arrangements. It also shows that decisions regarding levels of independence and accountability are not well-connected. The results also show that the likelihood for establishing governance arrangements suitable for supervision is higher when the supervisor is located outside the central bank

Independence and Accountability in Supervision: Comparing Central Banks with Financial Authorities

Unlike the monetary policy function – nowadays, invariably the core function of a central bank – the financial supervisory function is being performed by a variety of institutions for whom there is less consensus about the governance model than for central banks. This chapter sheds light on recent trends in, and determinants of, financial supervisory governance, with special attention to the position of the central bank. We first identify similarities and differences in the theoretical approaches to the two key features of governance for central banks and supervisors – independence and accountability. We then disentangle empirically the institutional differences between supervisory regimes governed by central banks and other institutional arrangements. The analysis of the determinants of independence and accountability arrangements for supervisors indicates that (1) the quality of public sector governance plays a decisive role in establishing accountability arrangements, more than independence arrangements; (2) politicians' decisions regarding the degree of independence and accountability seem to be driven by different sets of considerations; and (3) the likelihood for establishing governance arrangements suitable for the supervisory task seems to be higher when the supervisor is located outside the central ban

Independence and Accountability in Supervision: Comparing Central Banks with Financial Authorities

Unlike the monetary policy function which is nowadays invariably the core function of a central bank, the supervisory function is being performed by a variety of institutions for whom there is less consensus about the governance model than for central banks as monetary policy agents. This paper analyzes empirically recent trends in, and determinants of, financial supervisory governance, with special attention to the role of the central bank as supervisor. As its starting point, the paper identifies the similarities and differences between our analysis and the central bank literature in defining the two key features of a good governance: independence and accountability. Then we calculate the levels of supervisory independence and accountability in 55 countries, disentangling the institutional differences between supervisory regimes governed by central banks from those in which a different authority is in charge of supervision. Finally, the empirical analysis of the determinants of emerging independence and accountability arrangements indicates that the quality of public sector governance plays a decisive role in establishing accountability arrangements, more than independence arrangements. Politicians’ decisions on the degree of independence and accountability of their supervisors seem to be driven by a different set of considerations. Only polity is present in both, meaning that the more mature a democracy is, the more likely it is that higher degrees of independence and accountability will be granted. Accountability is additionally driven by crisis experiences, while independence is influenced by a kind of bandwagon effect. The results also show that the likelihood for establishing governance arrangements suitable for the supervisory task seems to be higher when the supervisor is located outside the central bank

Inside and outside the central bank: Independence and accountability in financial supervision: Trends and determinants

This paper analyzes recent trends in, and determinants of, financial supervisory governance inside and outside central banks. We first review the case for supervisory independence and accountability in order to frame the econometric work on their determinants. We then calculate the levels of supervisory independence and accountability in 55 countries, disentangling similarities and differences among central banks and pure financial supervisors. The empirical analysis of the determinants indicates that the quality of public sector governance plays a decisive role in establishing accountability arrangements, more than independence arrangements. It also shows that decisions regarding levels of independence and accountability are not well-connected. The results also show that the likelihood for establishing governance arrangements suitable for supervision is higher when the supervisor is located outside the central bank.Financial supervision Central banking Independence Accountability Political economy