Quality More Important than Independence in Regulation
In a paper that has implications for the restructuring of US financial regulation, International Montery Fund staff find that the quality of public sector governance is more important than supervisory independence.
The paper, by Donato Masciandaro, Marc Quintyn, and Michael Taylor, which does not represent the IMF’s official position on the matter, notes that “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 as yet no consensus about the governance model.” The paper analyzes recent trends in, and determinants of, financial supervisory governance.
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.
“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 and when the country has decided to establish an integrated supervisor. Since these integrated supervisors are typically entirely new agencies, i.e. established from scratch, their creation seems to give the policymakers the
opportunity to devote more attention to the design of appropriate governance arrangements.”
The paper also finds that “policymakers do not consider independence and accountability as two sides of the same coin. Several empirical observations in our sample indicate that decisions on the degrees of independence and accountability are not connected. At best we find that both are seen as weakly complementary to each other. So one lesson from this analysis is that the dynamics between independence and accountability are not clearly understood.”
A second lesson is that central banks that are also supervisors, may wish to revisit some of their governance arrangements to better meet the requirements posed by financial sector supervision.
The full paper Financial Supervisory Independence and Accountability – Exploring the
Determinants, can be downloaded free of charge.
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