## _wp0551 ## Source details **Canonical URL:** [_wp0551](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp0551.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp0551.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp0551.pdf.json) --- ### I. Introduction — context, problem, and thesis - Problem statement: - Independence for financial sector supervisors (Regulatory and Supervisory Agencies, RSAs) "remains controversial" despite broad support for central bank independence. - Policymakers fear an independent RSA could act as "an unelected fourth branch of government" (Majone (1993)) and supervisory actions may be highly politicized and affect individual property rights. - Theories of regulatory capture (Stigler, 1971) and political incentives (Alesina and Tabellini (2004)) explain reluctance to delegate RSA control; empirical support: failing banks in emerging markets are less likely to be taken over or lose licenses before elections than after (O’Neil Brown and Dinc (2004)). - Prior standards and evidence: - The Basel Core Principles (BCP) for Effective Banking Supervision (1997) emphasized operational independence for bank supervisory authorities. - Earlier treatments: Lastra (1996), Goodhart (1998); systematic discussion: Quintyn and Taylor (2003); empirical support: Das, Quintyn, and Chenard (2004). - Purpose and central thesis: - Purpose: clarify accountability, interaction of independence and accountability, and design of accountability mechanisms to reduce reluctance to grant independence. - Thesis: freedom from political control need not imply unaccountable bureaucracy; properly structured accountability arrangements are fully consistent with agency autonomy and can strengthen independence by providing legitimacy. Bad accountability arrangements can undermine independence by enabling de facto control through de jure mechanisms. - Conceptual critique: - The independence–accountability "trade-off" (principal–agent framing) is flawed: accountability is not synonymous with control and independence is never absolute. Accountability should be a network of complementary and overlapping checking mechanisms (Majone, 1994; Moe, 1987). - RSA-specific challenges: - Multiple principals, multiple (often nonmeasurable) objectives, far-reaching intervention powers — answers to "Accountability to whom?" and "Accountability by what means?" vary by context and require tailored arrangements. - Paper structure (excerpted): Section II — role/functions of accountability; Section III — RSA vs. central bank features and implications; Section IV — design of accountability arrangements; Section V — conclusions. ### II. Role and functions of accountability (framework and implications) - Definitions preserved: - Accountability: “obliged to give a reckoning or explanation for one’s actions; responsibility.” - Responsibility: “legally or morally obliged to take care of something or to carry out a duty; liable to be blamed for loss or failure.” - Traditional vs. contemporary framing: - Traditional: two elements — (i) checking performance (“holding to account”); (ii) requirement to take responsibility for failure, make amends, and prevent recurrence. - Contemporary: accountability broadened from vertical to include horizontal relationships with multiple principals (participatory democracy, media, civil society). Behn (2001): properly structured accountability can provide legitimacy and improve agency governance and performance. - Four main functions of accountability for independent RSAs: - (i) provide public oversight; - (ii) maintain and enhance legitimacy; - (iii) enhance agency governance; - (iv) improve agency performance. - Public oversight: - Delegation implies principals (legislature/executive) retain ultimate responsibility; tension between retaining political legitimacy and ensuring agency autonomy. - Institutional embedding: agency position governed by constitutional system and hierarchy of legal norms; allocation of powers limited to those necessary to achieve objectives. - Legitimacy: - Legitimacy required in eyes of political principals, regulated firms, and broader public. - Accountability builds legitimacy by enabling explanation of mandate, creating public forums for stakeholder input, and transforming public understanding into reputational assets (competency, probity, integrity). - Complementarity: accountability generates legitimacy; legitimacy supports independence — particularly important where institutional governance is weak. - Agency governance: - Four institutional underpinnings (Das and Quintyn (2002)): independence, accountability, transparency, integrity — equally important and mutually reinforcing. - Conclusions: (i) independence is not an end in itself; (ii) accountability complements independence; (iii) accountability combined with transparency enhances integrity and reduces corruption opportunities. - Empirical finding: Das, Quintyn, and Chenard (2004) — an index of good regulatory governance practices is positively and significantly correlated with an index of financial system soundness for a sample of approximately 50 countries; impact stronger if supported by sound public sector governance. - Performance: - Accountability can enhance performance via review rules that reduce ad hoc/discretionary interventions (judicial review parameters, periodic reporting obligations). - Accountability stimulates constructive dialogue with government, internalizes norms, and facilitates coordination (dialogue model, Majone (1993)). ### III. Why central bank accountability models cannot be transplanted wholesale to RSAs - Central bank reference: - Debate on central bank accountability is more advanced and often focuses on monetary policy/inflation targeting with single numerical targets. - Key contrasts (summary of Table 1): - Objectives: - RSA: Multiple; Difficult measurability; Priorities may change. - Central Bank (Monetary Policy): Single; Numerical objective; Simple because single and numerical. - Confidentiality vs. transparency: - RSA: Tension between public interests and financial stability; confidentiality of measures may be necessary. - Central Bank: Transparency generally considered helpful; legal protection desirable. - Regulatory function: - RSA: Broad-ranging rule-making powers. - Central Bank: Limited (monetary policy–specific). - Supervisory and enforcement function: - RSA: Proactive enforcement; broad intervention and sanctioning powers; can act on initiative; impact on civil rights (property rights). - Central Bank: No comparable proactive enforcement impacting civil rights. - Principal-agent relationships: - RSA: Multiple and complex. - Central Bank: Simple. - Implication: - RSA accountability requires tailored, more complex arrangements; narrowing RSA functions as with central banks is generally infeasible. ### IV. Measurability, confidentiality, enforcement, and multiple principals — operational challenges - Agency objectives — measurability and operationalization: - Problems for RSAs: - objectives often not explicitly or clearly articulated in law; - RSAs face multiple objectives and potential competition with other authorities; - objectives typically hard to measure. - Remedies/limits: - Clarify law where possible; however, multiple/unmeasurable objectives are inherent and require special accountability-design attention. - Box 1 evidence on statutory objectives (selected country excerpts): - Examples of multiple statutory objectives preserved verbatim (United Kingdom FSA; Netherlands DNB; Japan FSA Act; Chile; Finland; Hungary; France; Italy; Switzerland). - United Kingdom FSMA: defines seven principles of operation to guide FSA rule-making and regulatory discharge (economic and efficient use of resources; proportionality; impact on innovation and international competitiveness). - Goodhart critique: - Objectives of RSAs refer to something “difficult—if not inherently impossible—to measure.” Example: the FSA statutory objective “the reduction in financial crime” lacks data on extent of financial crime; accountability in terms of such objectives is “effectively impossible.” - Fundamental contrast: central banks can have explicit measurable targets (e.g., inflation), RSAs cannot easily have analogous single measurable goals. - Confidentiality and transparency: - Transparency fosters well-reasoned and consistent decisions; publication of supervisory decisions and reasoning should be the presumption, even if delayed. - Yet regulatory decisions often retain commercial sensitivity; publicity can impair investigations, impartiality, depositor confidence, and stability — creating a tension between transparency and confidentiality. - Transparency is particularly important in rule-making (open/public consultation reduces perception of unfettered discretion). - Enforcement and sanctioning: - RSAs exercise proactive enforcement and a broad toolkit (special audits, onsite inspections, administrative/civil/criminal referrals). - Discretion in enforcement: choice between cooperative compliance and strict sanctions; prioritization based on cost-effectiveness and deterrence; public justification of enforcement discretion is important. - Performance metrics: measured by overall compliance and achievement of statutory objectives rather than raw counts of cases or convictions. - Multiple principals environment: - RSAs face a wide range of affected interests (shareholders, managers, customers, depositors, investors, public). - Traditional vertical accountability is inadequate; require diversified pluralistic mechanisms, including horizontal accountability and “360 degree accountability.” ### V. Typology and mechanisms for accountability (institutional arrangements) - Guiding principle: - Use a network of complementary and overlapping checking mechanisms to keep RSAs “under control” while preserving operational independence. - Accountability typology (preserved terms): - Ex ante vs. ex post accountability. - Explanatory accountability (duty to answer/explain) and amendatory accountability (obligation to redress). - Procedural accountability (due process) and substantive (functional) accountability. - Personal accountability (individual officers), financial accountability (financial statements), performance accountability ((measurable) objectives and criteria). - Parliamentary arrangements and tools: - Objectives: determine mandate appropriateness, whether delegated powers are exercised effectively, provide communication channel to amend legislation. - Institutionalized contacts/information flows: annual reporting (regular, at least annual); reporting to parliamentary committees; appearances before parliament and ad hoc inquiries; parliamentary representation on oversight/supervisory boards (with safeguards); delegation to finance ministry in some jurisdictions (risk noted; direct supervisor–parliament contacts recommended). - Executive/ministerial relationships: - Objectives: information sharing; dialogue on legal framework; appointment/dismissal as element of personal accountability. - Arrangements: annual reports; regular reporting (monthly, quarterly) with aggregate disclosure only; clear criteria for dismissal; ministry of finance as oversight authority at arm’s length; limit direct governmental representation in operational/policy matters. - Judicial accountability: - Judicial review ensures RSAs act within law and observe due process (notice, access to material, opportunity to make representations, information on legal remedies). - Review constrained by legislation and courts’ deference to supervisory expertise; substantive review should be limited and time-bound. - Supervisory liability: public liability exists but is limited; officials acting in good faith generally not personally liable; high standards for damages/admitting liability; immunity/limited liability must be compensated by accountability mechanisms. - Stakeholders and market-based accountability: - Objectives: accountability to fee-paying supervised institutions, consumers, and public. - Arrangements: transparency (regulations, practices, important decisions subject to confidentiality rules), consultation and participation (publication of draft rules, reasoned explanations, regulatory impact analysis where possible), representation (industry and consumer representation on oversight/advisory bodies; practitioner/consumer panels with consultation/response procedures). - Audit and financial accountability: - Objective: ex post budgetary accountability via independent audits; independent financial audits to determine proper financial management. - Funding: financial independence and self-supporting funding from supervised entities desirable but practices differ (consolidated budgets, ministerial approvals). - Arrangements: independent auditors, internal inspectorate (inspector general) reporting to board/parliament; examples cited from United Kingdom, Germany, Netherlands, Australia, Canada. - International monitoring: - Objective: external monitoring via international surveillance and peer review to limit cross-border contagion and enhance legitimacy. - Arrangements: FSAP by IMF and World Bank; mutual evaluations and peer review by FATF and regional bodies; bilateral peer review and equivalence assessments. ### VI. Evidence from national models (selected country mandates and institutional features) - Box 1 and Appendix excerpts (selected preserved items): - Many countries explicitly state multiple statutory objectives (examples preserved verbatim): United Kingdom (FSA), Netherlands (DNB), Japan (FSA Act), Chile, Finland, Hungary, France, Italy, Switzerland. - Statutory objectives are often general and nonoperational; operationalization pursued via principles of operation, procedures, or defined results (United Kingdom FSMA example: seven principles of operation). - Institutional arrangements vary in management structure, oversight boards, reporting lines to government and parliament, publication practices, and audit/budgetary procedures (detailed country-level excerpts preserved in Appendix I and Part II/III tables). - Sample institutional features preserved exactly include board compositions (e.g., Korea: nine commissioners; APRA: no less than three and no more than five), appointment processes, reporting channels, and audit arrangements (e.g., Auditor General in Australia; Auditor General of Canada; general comptroller in Chile). - Empirical correlation: - Das, Quintyn, and Chenard (2004): positive and significant correlation between regulatory governance index and financial system soundness index for a sample of approximately 50 countries; stronger when supported by sound public sector governance. ### VII. Conclusions and policy implications (building blocks and recommendations) - Sources of unease about RSA independence: - Fears of an unelected “fourth branch,” regulatory capture, and political retention of redistributive tasks. - Accountability is more elusive than independence: - Properly constructed accountability arrangements make independence effective and legitimate. - Three building blocks assembled: - Role and purpose of accountability: four functions — public oversight, legitimacy, integrity of public sector governance, agency performance enhancement. - RSA distinctive features relative to central banks: greater contingencies, multiple and often vague/nonmeasurable mandates, confidentiality/market sensitivity, multiple principals, extensive enforcement powers — necessitating more complex accountability systems than for monetary policy. - Detailed mechanisms and arrangements from law and practice to secure accountability objectives. - Policy recommendations and implications (preserved formulations and emphasis): - Design strong, properly constructed accountability arrangements to support RSA independence. - Establish RSA mandates as concretely as possible and define functions to meet mandates. - Consider institutional reform to limit the number of goals per agency (example referenced: Dutch supervisory reform). - Revisit accountability arrangements where central banks also perform supervisory functions; supervisory functions warrant more elaborate arrangements than those for monetary policy alone. - Findings apply beyond financial sector regulators to independent RSAs in other economic sectors and to central banks adding financial stability to their mandates; existing central bank accountability arrangements may be poorly designed with respect to financial stability objectives. *Source: Appendix I and Sections I–V, Box 1, and selected country tables of the supplied IMF document (_wp0551).* ### Appendix I. They also would like to thank Charles Goodhart, Peter Hayward, Rosa Lastra, Tony Lybek, and ### Appendix I. They also would like to thank Charles Goodhart, Peter Hayward, Rosa Lastra, Tony Lybek, and ### I. Introduction - Context and problem statement - Unlike the case for central bank independence, which has broad support, independence for financial sector supervisors (Regulatory and Supervisory Agencies, RSAs) "remains controversial." - Emerging empirical research indicates that independence for RSAs is beneficial for financial system soundness (footnote 2 and 3). - Policymakers are reluctant to grant independence because of concerns that an independent RSA could act as "an unelected fourth branch of government" (Majone (1993)) and because supervisory actions can be highly politicized and affect individual property rights. - Theories of regulatory capture (Stigler, 1971) influence the debate: without proper political oversight, regulators may promote industry interests over consumers. - Political economy considerations - Alesina and Tabellini (2004) present a formal model suggesting politicians retain tasks that generate rents, campaign contributions, bribes, or redistributive effects, explaining reluctance to delegate control over RSAs. - The political class may view the financial system as a vehicle for redistributive policies (directed and connected lending) and to generate rents from politically connected banks. - Empirical support: O’Neil Brown and Dinc (2004) show failing banks in emerging markets are much less likely to be taken over by the government or to lose their license before elections than after (footnote 4). - Prior literature and standards - The Basel Core Principles (BCP) for Effective Banking Supervision, first issued in 1997, emphasized operational independence for bank supervisory authorities. - Earlier mentions of the need for independence appear in Lastra (1996) and Goodhart (1998); Quintyn and Taylor (2003) discussed independence systematically; empirical support presented in Das, Quintyn, and Chenard (2004). - Paper’s purpose and thesis - Purpose: clarify the notion of accountability, the interaction between independence and accountability, and the design of accountability mechanisms to reduce reluctance to grant independence. - Central thesis: agency independence need not create a regulatory bureaucracy "answerable to no one"; properly structured accountability arrangements are fully consistent with agency autonomy and can strengthen independence by providing legitimacy. - Bad accountability arrangements can undermine independence by enabling de facto control through de jure accountability mechanisms. - Conceptual critique of the independence–accountability "trade-off" - Standard principal-agent framing (delegation as contract) leads to a dilemma: either the agency self-assesses (independence) or an external body assesses (control), yielding the perceived "trade-off." - The paper argues this trade-off framing is flawed: accountability is not synonymous with control and independence is never absolute. - Accountability should be seen as a network of complementary and overlapping checking mechanisms (Majone, 1994), such that "no one controls the independent agency, yet the agency is 'under control'" (Moe, 1987). - Specific challenges for RSAs - RSAs often operate in a multiple principals environment, have multiple objectives (many nonmeasurable), and possess far-reaching intervention powers in supervised entities. - Consequently, answers to "Accountability to whom?" and "Accountability by what means?" vary by context, requiring more attention to the structure of accountability arrangements to bolster agency independence and governance. - Structure of the paper (as provided) - Section II: analysis of the role and functions of accountability. - Section III: features of RSAs that differ from central banks and implications for accountability. - Section IV: design of accountability arrangements informed by previous sections. *Source: Appendix I and I. Introduction of the supplied IMF document excerpt.* ### Section V brings together the conclusions of this paper. ### _wp0551 - Section V brings together the conclusions of this paper. ### II. ROLE AND FUNCTIONS OF ACCOUNTABILITY - Definitions: - Accountability: “obliged to give a reckoning or explanation for one’s actions; responsibility.” - Responsibility: “legally or morally obliged to take care of something or to carry out a duty; liable to be blamed for loss or failure.” - Traditional conception: - Two elements: (i) checking on the accountee’s performance (“holding to account”); (ii) requirement that the accountee takes responsibility for failure, makes amends, and prevents recurrence. - Principal/agent framing: the accountor gives the mandate and delegates power; the accountee receives power and must give account. - Contemporary shift: - Accountability relationships broadened from vertical to include horizontal relationships with multiple principals due to participatory democracy, greater media role, and civil society involvement. - Behn (2001) cited: accountability now more extensive and, if properly structured, can provide legitimacy and improve agency governance and performance. - Four main functions of accountability for independent RSAs: - (i) provide public oversight; - (ii) maintain and enhance legitimacy; - (iii) enhance agency governance; - (iv) improve agency performance. - Complementarity noted between lawyers’ political emphasis and economists’ performance emphasis through recognition of these four functions. ### A. Provide Public Oversight - Classical function: legislatures/parliaments exercising oversight of the executive. - Key tensions: - Authority is delegated (not forsaken) → principal (legislative or executive) retains ultimate responsibility. - Tension between retaining ultimate responsibility/political legitimacy and ensuring agency autonomy. - RSA needs independence from political pressures while being held accountable for activities. - Institutional embedding: - Accountable agency’s position is governed by the country’s constitutional system and hierarchy of legal norms. - Allocation of public powers to an independent agency is limited to powers necessary to achieve objectives. - Accountability is by definition toward legislative and executive principals. ### B. Maintain and Enhance Legitimacy - Legitimacy conditions: - Agency actions must have legitimacy in eyes of political principals, regulated firms, and broader public to be effective. - Legitimacy can be generated by clear legal foundations and through accountability mechanisms and relations. - Functions of accountability for legitimacy: - Permits agency to explain pursuit of its mandate to a broader public, building understanding and support. - Creates public forum for stakeholder representations, reducing incentives for private influence. - Transforms public understanding into reputation (competency, probity, integrity) which helps in contentious decisions. - Complementarity: - Accountability generates legitimacy; legitimacy supports independence — relationship is complementary, not a trade-off. - Particularly important in countries with weak institutional and governance structures. - Note on narrower legality-based legitimacy: - “According to the law” legitimacy is indispensable but accountability bolsters broader legitimacy by explaining actions and involving stakeholders. ### C. Enhance Agency Governance - Four institutional underpinnings for RSAs (Das and Quintyn (2002)): - independence, accountability, transparency, integrity. - Interactions: - The four underpinnings are equally important and reinforce/hold each other in balance to avoid excess/dysfunction. - Conclusions from this framework: - (i) independence is not a goal in itself but part of underpinnings for good governance; - (ii) accountability is complementary and supportive of independence; - (iii) accountability combined with transparency enhances integrity of staff and reduces corruption opportunities. - Empirical support: - Das, Quintyn, and Chenard (2004): an index of good regulatory governance practices is positively and significantly correlated with an index of financial system soundness for a sample of approximately 50 countries; impact stronger if supported by sound public sector governance. ### D. Improve Agency Performance - Accountability as performance enhancer: - Not only monitoring/blaming/punishment — also about enhancing performance via review rules that reduce ad hoc/discretionary interventions. - Properly structured judicial review sets parameters for grounds to challenge agency decisions. - Periodic reporting obligations protect senior management from frequent vexatious questioning. - Well-designed accountability can buttress agency independence. - Dialogue with government: - Accountability provides input to government to (re)shape broader economic and financial policies. - Accountability process reproduces, internalizes, and adjusts norms (Bovens, 2004). - Agencies should share domain expertise with government — accountability stimulates coordination and enhances legitimacy (dialogue model, Majone (1993)). ### III. CONTRASTING ACCOUNTABILITY ARRANGEMENTS FOR CENTRAL BANKS AND FINANCIAL SECTOR SUPERVISORS - Reference point: - Independent central banks are a natural reference; debate on central bank accountability is more advanced, often focused on monetary policy and inflation targeting. - Central claim: - Accountability mechanisms for central banks as monetary policy authorities cannot simply be transferred to RSAs. - Reasons: greater range of contingencies in regulation/supervision; difficulty of precisely specifying objectives → any contract for an RSA is radically incomplete. - Implication: - Complexity of regulatory process requires accountability arrangements tailored to RSAs; narrowing RSA functions as with central banks is not feasible. ### Key differences between RSAs and Monetary Policy Authorities (Table 1 summary) - Objectives: - Financial Sector Supervisor: Multiple; Difficult measurability; Priorities may change. - Central Bank (Monetary Policy): Single; Numerical objective; Simple because single and numerical. - Confidentiality vs. transparency: - RSA: Tension between public interests and financial stability; confidentiality of measures may be necessary. - Central Bank: Transparency generally considered helpful; legal protection desirable. - Regulatory function: - RSA: Broad-ranging regulatory (rule-making) powers. - Central Bank: Limited (monetary policy–specific). - Supervisory and enforcement function: - RSA: Proactive enforcement; broad intervention and sanctioning powers; can act on their own initiative; impact on civil rights (property rights) must be taken into account. - Central Bank: No (proactive enforcement, broad intervention, or similar impact on civil rights). - Principal-agent relationships: - RSA: Multiple and complex. - Central Bank: Simple. ### A. Agency Objectives (detailed observations) - Well-defined statutory objective is a traditional key requirement for accountability. - For central banks: price stability (increasingly) and measurable performance. - For RSAs: three complications: - objectives often not explicitly or clearly articulated in law; - RSAs often face multiple objectives and may compete with other authorities in achieving them; - objectives typically hard to measure. - Remedies and limits: - First problem (unclear law) can be addressed by amending law. - The latter two problems are inherent to the nature of RSA work and require special attention in accountability design. ### Clear objectives - Appendix I and Box 1 indicate only relatively few cases where regulatory agency objectives are explicitly and clearly articulated in law. - Example: United Kingdom’s Financial Services Authority (FSA) given precision in the Financial Services and Markets Act 2000 (FSMA), though defining functions to facilitate accountability remains challenging. ### Multiple objectives - RSAs commonly face several objectives, posing prioritization and weighing problems when assessing performance. - Typical objectives include: - preservation of financial system soundness; - protection of ill-informed retail consumers; - preventing market abuse; - fighting economic crime and money laundering; - promotion of market development (in some emerging markets). - Multiple objectives create competing roles and responsibilities and can lead to conflicts (e.g., strict market-conduct rules vs. market development). - Defining relationships among multiple goals requires special attention in accountability design. *Source: _wp0551 - Section V brings together the conclusions of this paper.* ### Box 1. Financial Supervisors’ Mandates in Selected Countries ### Box 1. Financial Supervisors’ Mandates in Selected Countries ### Legal objectives of financial supervisors (examples) - Most laws state multiple objectives. Examples quoted in source: - United Kingdom (Financial Services Authority, FSA): “maintaining confidence in the financial system,” “promoting public understanding of the financial system,” “securing the appropriate degree of protection for consumers,” and “reducing financial crime.” - Netherlands (De Nederlandsche Bank): “contributing to the smooth conduct of policies relating to the prudential supervision of credit institutions and the stability of the financial system.” - Japan (Japanese FSA Act): “establishing a stable and dynamic financial system” and “ensuring transparency and fairness in financial administration.” - Chile: “supervising the entities put under its responsibility” and “issuing instructions and adopting all measures to correct irregularity in the supervised entities to protect depositors, other creditors, and the public interest.” - Finland (Finnish Act of the FSA): objective “to promote financial stability and public confidence in the operation of financial markets.” - Finnish FSA strategic objectives: ensuring that “supervised entities’ capacity to bear all of their risk-taking is good and corporate governance culture is sound,” “publicized information and market practices promote sound market development,” and “the regulatory regime is proactive and the FSA’s supervision and enforcement meets the requirements of accountability.” - Hungary (Hungarian FSA): “enhancing the transparency of markets” and “maintaining a fair and regulated market competition through the permanent surveillance of the prudent operation of organizations and entities engaged in financial services.” - France: “maintaining fair and competitive markets.” - Italy: “overall stability of the financial system” together with “efficiency and competitiveness of the financial system.” - Switzerland: objective “to protect depositors and to maintain the trustworthiness and orderly functioning of the banking system in the public interest.” ### Operationalizing objectives: principles and procedures - Statutory objectives formulated in general terms are “not operational.” Their achievement “cannot be measured.” - Objectives can be made more precise “by principles of operation, procedures, or by a very specific result to be achieved.” - United Kingdom approach (FSMA): - FSMA is to define seven principles of operation that the FSA must bear in mind when discharging its regulatory function (making rules, issuing codes, and giving general guidance). - These include considerations regarding: - “the economic and efficient use of its resources and the responsibilities of those who manage the affairs of authorized persons”; - proportionality of burdens or restrictions on the industry; - the impact on innovation and international competitiveness. - Similar principles may be defined to evaluate discharge of supervision and enforcement functions, relating to: - a risk-oriented supervisory approach; - the most efficient use of resources; - a focused enforcement policy (power enforcement). ### Measurability and accountability challenges - Goodhart critique (Goodhart, 2001) summarized: - Objectives of RSAs refer to something “difficult—if not inherently impossible—to measure.” - Example: to decide whether the United Kingdom’s FSA had met the fourth statutory objective—“the reduction in financial crime”—would require data on the extent of financial crime being perpetrated, “which does not exist.” - If the number of cases brought to trial is reduced, this could indicate either that the regulatory agency is successful or that fewer cases are being detected. - Goodhart: “it is difficult to come to any other conclusion except that the achievement of the objectives that have been set for the FSA are nonoperational in the sense that no measurement of success can be achieved. Accountability in terms of these objectives is effectively impossible” (p.153). - Fundamental contrast with monetary policy: - The difficulty of formulating RSA objectives in any measurable sense “goes to the heart of the differences between an RSA and a monetary policy authority.” - Central banks can be given explicit targets (for example, an inflation target) and “held to account for meeting that objective,” whereas “there is no clear analogue in regulation and supervision of having a single, measurable goal to be attained.” - Footnote (as cited in source): - Principle 1 of the BCP for Effective Banking Supervision explicitly provides that “an effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks.” - The Core Principles Methodology cites as additional criterion that “The supervisory agency sets out objectives, and is subject to regular review of its performance against its responsibilities and objectives through a transparent reporting and assessment process.” *Box 1. Financial Supervisors’ Mandates in Selected Countries — source PDF content.* ### references to apparently quantifiable objectives (such as the reduction of financial crime) ### _wp0551 - references to apparently quantifiable objectives (such as the reduction of financial crime) ### Measurability of RSAs’ objectives - Regulatory and supervisory objectives often are not operational when expressed as apparently quantifiable objectives (such as the reduction of financial crime) because regulation and supervision focus on prevention of events rather than attainment of specific positive targets. - Objectives inevitably involve a large element of judgment (examples given include: appropriate level of consumer protection; level of sophistication at which individuals can protect their own interests; distinctions between natural and legal persons; where to draw the line between sole trader and multinational conglomerate). - Broad regulatory discretion makes it difficult to use regulatory objectives to hold regulators to account. - Options to improve operational accountability: - Regulatory objectives could be expressed in terms of the negative goal of preventing certain undesirable outcomes to focus activities and guide resource use. - Objectives could be complemented by principles of operation, procedures, or a very specific result to be achieved; publishing a strategy or policy for a given period makes accountability more operational. - Build accountability relations with all stakeholders to create broad understanding of objectives and performance, thereby fostering reputation. ### Confidentiality and Transparency - Transparency is a key feature of satisfactory accountability arrangements; central bank transparency practices (e.g., publishing minutes) are highlighted as precedent. - Differences between monetary policy and supervision: - Monetary policy rationales lose commercial sensitivity relatively quickly; regulatory decisions often retain commercial sensitivity and publicity can impair investigations, impartiality, depositor confidence, and stability. - Publication of supervisory decisions and reasoning should be the presumption, even if delayed, because transparency fosters well-reasoned, legally- and fact-grounded, and consistent decisions and reduces arbitrary outcomes. - Transparency is particularly important in rule-making: - Wide range of interested parties: legislators, financial services industry, industry customers/general public. - Open and public consultation during rule making enhances legitimacy, ensures rules are well-reasoned and practical, and reduces perception of unfettered regulatory discretion. ### Enforcement and sanctioning powers - RSAs possess enforcement and sanctioning powers that distinguish them from central banks and courts. - Key features: - No direct counterpart to RSA enforcement powers in central bank monetary policy powers. - Regulatory enforcement is proactive and undertaken on the RSA’s initiative; enforcement is a means to achieve statutory objectives, not the objective itself. - Enforcement toolkit includes intensified monitoring (special audits, onsite inspections) and formal sanctioning powers (administrative, civil, criminal referrals). - RSAs exercise considerable discretion: choices between cooperative compliance and strict sanctions; prioritization based on likely cost-effective outcomes; focus on high-profile cases for deterrence; case selection influenced by available enforcement resources. - Enforcement strategy considerations: - Set out priorities and policies that map to statutory objectives and keep harm within tolerable limits. - Consider achieving compliance, promoting deterrence, addressing financial risk, ensuring confidence, enhancing fair competition, and preserving enforcement credibility. - Public justification of enforcement discretion is important; performance is measured by overall compliance and achievement of statutory objectives rather than number of cases or convictions. ### Multiple principals environment - Unlike central banks (typically single principal-single agent), RSAs operate under delegated authority with a wide range of affected interests (shareholders, managers, customers, depositors, investors, public). - The traditional vertical accountability model is inadequate; RSAs operate in a multiple principals environment requiring diversified and pluralistic accountability mechanisms, including a horizontal dimension (“accountability forum”, “360 degree accountability”). - Mechanisms must ensure representation of legislative, executive, judicial branches and other groups (supervised entities, customers, public, peers). ### Establishing mechanisms to ensure accountability — typology and arrangements - Guiding principle: complex regulatory tasks and multiple principals require a network of complementary and overlapping checking mechanisms to keep RSAs “under control” while preserving operational independence. - Accountability types (as presented): - Ex ante vs. ex post accountability. - Explanatory accountability (duty to answer/explain) and amendatory accountability (obligation to redress). - Procedural accountability (due process) and substantive (functional) accountability. - Personal accountability (individual officers), financial accountability (financial statements), performance accountability ((measurable) objectives and criteria). - Relationship to legislature (parliamentary accountability) — objectives: - Determine appropriateness or need to reformulate mandate. - Determine whether delegated powers are exercised effectively and whether amendments are necessary. - Provide communication channel to amend legislation. - Parliamentary arrangements (institutionalized contacts and information flows): - Annual reporting (regular, at least annual). - Reporting to parliamentary committees for expertise and continuity. - Appearances before parliament and ad hoc inquiries (oral consultations, hearings, written inquiries). - Parliamentary representation in oversight/supervisory board (with safeguards to avoid political interference; representatives should not be involved in operational or policy matters). - Delegation to the finance ministry in some jurisdictions (risk of political involvement; recommended to retain direct contacts between supervisor and parliament). ### Relationship to the executive branch (ministerial accountability) - Objectives: - Information sharing: government needs sector developments information without breaching confidentiality. - Government as issuer of regulations: dialogue on legal framework quality. - Government as appointer: element of personal accountability. - Arrangements: - Reporting of information: annual reports, regular reporting (monthly, quarterly), complemented by dialogue; aggregate disclosure only; no individual confidential bank data under normal circumstances. - Appointment and dismissal procedures: appointment by government/head of state; reappointment/dismissal as ex post personal accountability; laws should include clear criteria for dismissal. - Ministry of finance as oversight authority: oversight should evaluate performance without direct involvement in operational/policy decisions; arm’s-length relationship recommended. - Direct governmental representation on oversight bodies should be limited to nonexecutive roles; involvement in policy would jeopardize operational independence. ### Judicial accountability - Objectives: - Judicial review is a cornerstone of accountability, ensuring RSAs act within law and observing due-process requirements (notice, access to material, opportunity to make representations, information on legal remedies). - Judicial scrutiny constrained by legislative provisions and courts’ deference to supervisory expertise; substantive review is limited; review should be limited and time-bound. - Arrangements: - Administrative review within administrative framework may exist; independent expert review bodies can be preferable to ministerial review to preserve independence. - Judicial review: systems vary (unitary jurisdiction, quasi-judicial authorities, dualist administrative courts); administrative review complements but cannot entirely replace judicial review. - Supervisory liability: principle of public liability exists but liability for faulty supervisory action is limited; officials acting in good faith generally are not personally liable; high standards for admitting liability and awarding damages are common; immunity/limited liability needs compensation via accountability arrangements. ### Accountability toward stakeholders and the public (market-based accountability) - Objectives: - RSAs accountable to fee-paying supervised institutions, consumers (when consumer protection is within mandate), and the public (depositors/investors/voters). - Transparency, consultation, participation, and representation confer legitimacy. - Arrangements: - Transparency: disclosure of regulations, supervisory practices, important decisions (subject to confidentiality/market-sensitivity), annual reports, press conferences; most countries require annual reports. - Consultation and participation: frequent consultation with supervised institutions; formalized rule-making process with publication of draft rules, reasoned explanations, regulatory impact analysis/cost-benefit assessments where possible; publish account of comments and responses. - Representation: industry and consumer representation on oversight boards or advisory bodies in certain jurisdictions (examples cited: Germany, France, Netherlands); panels or practitioner/consumer panels as in the United Kingdom with specified consultation/response procedures. ### Audit (financial accountability) - Objective: - Ex post budgetary accountability through independent audits to determine proper financial management and whether financial reports present a true and fair view. - Financial independence and self-supporting funding from supervised entities is desirable, though arrangements differ across jurisdictions (examples provided where budgets are consolidated or approved via government processes). - Arrangements: - Financial audit by independent auditors; examples of practices in United Kingdom, Germany, Netherlands. - Internal inspectorate (inspector general) reporting to board and/or parliament; example: Inspector General Act in the United States. ### Monitoring outside national jurisdictions - Objective: - International surveillance and peer review provide external monitoring of standards applied by RSAs to limit cross-border contagion and enhance legitimacy. - Arrangements: - Financial Sector Assessment Program (FSAP) by IMF and World Bank assesses regulatory and supervisory frameworks; resulting public report (with authorities’ approval) provides impartial account and recommendations. - Mutual evaluations and peer review by organizations like FATF and regional bodies for areas such as anti-money laundering; bilateral peer review and assessments of equivalence of legislation also used. ### Conclusions and policy implications - Sources of uneasiness about RSA independence include fears of an unelected “fourth branch,” regulatory capture, and political retention of redistributive tasks. - Accountability is more elusive than independence; properly constructed accountability arrangements can make independence effective. - Three building blocks assembled by the paper: - Role and purpose of accountability: its four functions are to provide public oversight, maintain legitimacy, enhance integrity of public sector governance, and enhance agency performance. - RSAs’ distinctive features relative to central banks: greater range of contingencies, multiple and often vague/nonmeasurable mandates, confidentiality and market sensitivity, multiple principals, and extensive enforcement powers—necessitating more complex accountability systems than for monetary policy. - Detailed mechanisms and arrangements to secure accountability objectives drawn from law and practice. - Policy recommendations and implications: - Design strong, properly constructed accountability arrangements to support RSA independence. - Establish RSA mandates as concretely as possible and define functions to meet mandates. - Consider institutional reform to limit the number of goals per agency (example referenced: Dutch supervisory reform). - Revisit accountability arrangements where central banks also perform supervisory functions; supervisory functions warrant more elaborate arrangements than those for monetary policy alone. - Findings apply beyond financial sector regulators to independent RSAs in other economic sectors and to central banks adding financial stability to their mandates; existing central bank accountability arrangements may be poorly designed with respect to financial stability objectives. *Source: _wp0551 - references to apparently quantifiable objectives (such as the reduction of financial crime)* ### REFERENCES ### _wp0551 - REFERENCES ### References (Selected citations) - Alesina, Alberto and Guido Tabellini, 2004, “Bureaucrats or Politicians,” NBER Working Paper, Series No. 1024. - Amtenbrink, Fabian, 1999, “The Democratic Accountability of Central Banks: A Comparative Study of the ECB,” (Oxford and Portland: Hart Pub.). - Basel Committee on Banking Supervision, 1997, “Core Principles for Effective Banking Supervision,” Publication No. 30, September (Basel: Bank for International Settlements). - Behn, Robert, 2001, “Rethinking Democratic Accountability,” Washington: Brookings Institution Press. - Bini Smaghi, Lorenzo, 1998, “The Democratic Accountability of the European Central Bank,” Banca Nazionale del Lavoro, No. 205, June. - Blair, Michael, Loretta Minghella, Michael Taylor, Mark Threipland, and George Walker, 2001, Blackstone’s Guide to the Financial Services and Markets Act 2000, (London Blackstone Press). - Bovens, Mark, 2004, “Public Accountability,” in Ferlie, E., Lynne, L., and Pollitt, C., (eds) “The Oxford Handbook of Public Management,” (Oxford: Oxford University Press). - Briault, Clive, A. Haldane, and M. King (1996), “Independence and Accountability,” Institute For Monetary and Economic Studies Discussion Paper Series, Bank of Japan. Discussion Paper 96. - Courtis, Neil, ed., 2001, “How Countries Supervise Their Banks, Insurers, and Securities Markets 2002.” (London: Central Banking Publications), pp. 266. - Das, Udaibir, and M. Quintyn, 2002, “Financial Crisis Prevention and Crisis Management—The Role of Regulatory Governance,” pp. 163–208 in Robert Litan, Michel Pomerleano and V. Sundararajan, eds., “Financial Sector Governance. The Roles of the Public and Private Sectors,” 2002, (Washington: Brookings Institution Press). - Das, Udaibir, M. Quintyn and K. Chenard, 2004, “Does Regulatory Governance Matter for Financial System Stability? An Empirical Analysis,” IMF Working Paper 04/89, (Washington: International Monetary Fund). - de Haan Jakob, F. Amtenbrink and S. Eijffinger, 1999, “Accountability of Central Banks: Aspects and Quantification,” Banca Nazionale del Lavoro, Quarterly Review, No. 209, June. - Eijffinger, Sylvester, and J. de Haan, 1996, “The Political Economy of Central Bank Independence,” Princeton Special Papers in International Economics. No 19. - Eijffinger, Sylvester, M. Hoeberichts and E. Schaling, 2000, “A Theory of Central Bank Accountability” CERP Discussion Paper 2354. - EGPA Study Group, 2001, “Legislative Oversight,” Glasgow Caledonian University. Glasgow 200:1. - Fischer, Stanley, 1994, “Modern Central Banking,” pp. 262–308 in Capie, F., C. Goodhart, S. Fischer and N. Schnadt (eds), “The Future of Central Banking. The Tercentenary Symposium of the Bank of England (Cambridge: Cambridge University Press), 362 pp. - Foster, Christopher, 2000, “Two Concepts of Accountability: Is a Bridge Possible Between Them?,” (London: PricewaterhouseCoopers), 50 pp. - Goodhart, Charles, ed. 1998, “The Emerging Framework of Financial Regulation,” (London: Central Banking Publications Ltd.). - Goodhart, Charles, 2001, “Regulating the Regulators—Accountability and Control,” pp. 151–164, in E. Ferran and C.A.E. Goodhart (ed), “Regulating Financial Services and Markets in the 21st Century” Hart Publishing, Oxford, United Kingdom. - Graham, C., 1998, “Is there a Crisis in Regulatory Accountability,” in R. Baldwin, C. Scott and C. Hood (eds), A Reader in Regulation” Oxford, Oxford University Press. - House of Commons Select Committee on Treasury, 1998, First Report from the Select Committee on Treasury “Accountability of the Bank of England,” Session 1997–98, HC 282. - Hüpkes, Eva H.G., 2000, “The Legal Aspects of Bank Insolvency” Kluwer Law International, (The Hague, The Netherlands). - International Monetary Fund, 1999, “Code of Good Practices on Transparency of Monetary and Financial Policies,” September (Washington: International Monetary Fund). - Jonk, Annet, Jersen Kramers and Dirk Schoenmaker, 2001, “A New Dutch Model,” The Financial Regulator, Vol 6, No. 3, December, pp. 35–38. - Key, Sidney, 2003, “The Doha Round and Financial Services Negotiations, (Washington American Enterprise Institute Press). - Khademian, Anne, 1996, “Checking on Banks. Autonomy and Accountability in Three Federal Agencies.” (Washington: Brookings Institution Press). - Lastra, Rosa Maria, 1996, Central Banking and Banking Regulation (London: LSE, Financial Markets Group), 392pp. - Lastra, Rosa Maria, 2001 “How Much Accountability for Central Banks and Supervisors?,” Central Banking, Vol XII, Nº 2, November, pp. 69–75. - Lastra, Rosa Maria, 2004, “Political Accountability of Financial Supervision at the European Level” paper prepared for a conference on European Financial Supervision, organized by the Dutch Ministry of Finance, December. - Lastra, Rosa Maria and Shams, H., 2001, “Public Accountability in the Financial Sector,” in E. Ferran and C.A.E. Goodhart (ed), “Regulating Financial Services and Markets in the 21st Century” Hart Publishing, Oxford, United Kingdom. - Lybek, Tonny, 1998, “Elements of Central Bank Autonomy and Accountability,” MAE Operational Paper, OP/98/1, (Washington: International Monetary Fund). - Majone, Giandomenico, 1993, “Controlling Regulatory Bureaucracies: Lessons from the American Experience, EUI Working Paper SPS 93/3. - Majone, Giandomenico, 1994, “Independence vs. Accountability? Non-Majoritarian Institutions and Democratic Government in Europe.” European University Institute Working Papers Nº 94/3. - Moe, Terry, 1987, “Interests, Institutions, and Positive Theory: the Politics of the NLBR,” Studies in American Political Development, Vol 2, pp. 236–99. - O’Neil Brown, Craig and Serdar Dinc, 2004, “The Politics of Bank Failures. Evidence from Emerging Markets,” University of Michigan Business School, drafts (Ann Arbor, Michigan). - Oosterloo, Sander and J. de Haan, 2003, “A Survey of Institutional Frameworks for Financial Stability,” Occasional Studies, De Nederlandsche Bank, Vol I, No. 4. - Page, Alan, 2001, “Regulating the Regulator—A Lawyer’s Perspective on Accountability and Control” in E. Ferran and C.A.E. Goodhart (ed), “Regulating Financial Services and Markets in the 21st Century” (Hart Publishing, Oxford, United Kingdom). - Persson, Torsten and Guido Tabellini (1993), “Designing Institutions for Monetary Stability,” Carnegie-Rochester Conference Series on Public Policy, Vol. 39, December, pp. 53–84. - Pistor, Katharina, and C. Xu, 2001, “Law Enforcement Under Incomplete Law: Theory and Evidence from Financial Market Regulation,” (Preliminary draft): London School of Economics, Department of Economics. - Quintyn, Marc, and M. Taylor, 2003, “Regulatory and Supervisory Independence and Financial Stability,” CESifo, Economic Studies, Vol 49, No. 2. - Radford, Mike, 1997, “Mitigating the Democratic Deficit? Judicial Review and Ministerial Accountability,” in “Administrative Law Facing the Future: Old Constraints and New Horizons in Peter Leyland and Terry Woods (eds). - Romzek, Barbara, 1996, “Enhancing Accountability,” in James Perry (ed), “Handbook of Public Administration,” (Jossey-Bass Publishers: San Francisco), 769 pp. - Romzek, Barbara, 1997, “Where the Buck Stops. Accountability in Reformed Public Organizations,” in P. Ingraham, J. Thompson and R. Sanders (eds) “Transforming Government. Lessons from the Reinvention Laboratories, (Jossey-Bass Publishers: San Francisco), 266 pp. - Shapiro, Martin, 1988, “Who Guards the Guardians?,” (The University of Georgia Press: Athens, GA). - Stigler, George, 1971, “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science, Vol. 6, No. 2, pp. 114–141. - Wilson, Woodrow, 1885, “Congressional Government: A Study in American Politics,” Boston, Hought Mifflin and Company (reprinted 1981). - Zilioli, Chiara, 2003, “Accountability and Independence: Irreconcilable Values or Complementary Instruments for Democracy? The Specific Case of the European Central Bank.” pp. 395–423 in G. Vandersonden (ed), “Mélanges en homage à Jean-Victor Louis,” ULB, Brussels, Belgium. ### Appendix I — Formal Accountability Arrangements for Financial Supervisory Authorities (Selected countries, Part I) - Countries covered: United Kingdom; Germany; The Netherlands; Australia; Canada. - Institutions listed: - United Kingdom: Financial Services Authority. - Germany: Federal Financial Supervisory Authority (BAFin). - The Netherlands: De Nederlandsche Bank N.V. (DNB); Authority for the Financial Markets (AFM). - Australia: Australian Prudential Regulation Authority (APRA). - Canada: Office of the Superintendent of Financial Institutions (OSFI). - Legal basis (exact phrases preserved): - United Kingdom: Financial Services and Markets Act 2000. - Germany: Act establishing the Federal Financial Supervisory Authority 2002. - The Netherlands: Among others, Bank Act 1998 and Act on the supervision of the credit system 1992. - Australia: Australian Prudential Regulation Authority Act 1998. - Canada: Office of the Superintendent of Financial Institutions Act 1997. - Functions (exact phrases preserved per country): - United Kingdom: “Supervision and regulation of banks, insurance companies, collective investment schemes, investment firms, exchanges, and clearing houses.” - Germany: “Supervision and regulation of banks, financial services institutions, insurance companies, securities and derivatives markets (supervision of financial and credit institutions takes place in close cooperation with the Bundesbank).” - The Netherlands: “DNB is responsible for (prudential) supervision of banks, life and non-life insurance companies, collective investment schemes, securities firms money transaction offices and trust offices. CB objective within the ESCB framework. AFM is responsible for the supervision of market conduct and the conduct of business of participants operating in the financial markets.” - Australia: “Prudential regulation and supervision of banks, life insurance companies, general insurance companies, superannuation, funds, credit unions, and building and friendly societies.” - Canada: “Supervision of banks and other federally incorporated financial institutions (comprising banks, trust companies, loan companies, life and other insurance companies and fraternal benefit societies).” - Statutory objectives (selected items preserved verbatim): - United Kingdom: “Maintaining confidence in the financial system.”; “Promoting public understanding of the financial system.”; “Securing the appropriate degree of protection for consumers.”; “Reducing financial crime.” - Germany: “Objectives described in the individual acts governing the supervisory activities (e.g., Banking Act, Securities Act and Insurance Supervision Act). Related to the stability and functioning of the financial system.” - The Netherlands (DNB): “with respect to the supervisory and regulatory functions … Within the framework of the European System of Central Banks contribute to the smooth conduct of policies relating to the prudential supervision of credit institutions and the stability of the financial system.” - Australia: “Provides prudential regulation or advice services according to the Act.” - Canada: “Supervise financial institutions to determine whether they are in sound financial condition and in compliance with the law. Advise management if this is not the case and require remedial action to be taken.” - Management structure (key items preserved verbatim): - United Kingdom: “A governing body consisting of a chairman and chief executive, Three managing directors (executive members of the governing body) and nonexecutive members.” - Germany: “President and a vice- president.” - The Netherlands (DNB): “Governing Board consisting of a president and between three to five executive directors, all appointed by the government. The president reports to the bank council on the general economic and financial situation and discusses the policy conducted by the bank with the bank council as well as other matters in connection with the bank’s objectives, tasks and activities.” - Australia: “APRA is to consist of no less than three members and no more than five.” - Canada: “Superintendent and deputy superintendents (the functions of deputy superintendents are currently performed by assistant superintendents).” - Oversight/boards and consultative arrangements (selected verbatim excerpts): - United Kingdom: “Nonexecutive committee (nonexecutive members of the governing body) has the responsibility for reviewing the performance (efficient use of resources) of the FSA, internal financial controls and remuneration of executive members.” - Germany: “Administrative Board (Verwaltungsrat) oversees management composition: chairman and deputy chairman from the finance ministry delegates from the finance ministry, ministry of economy, ministry of justice, parliament, banking industry, the insurance industry, the investment industry, and the Bundesbank (Without voting right). The chairman regularly must inform the Administrative Board on management activities.” - The Netherlands: “DNB: Supervisory Board consisting of between 9 and 12 members: One member appointed by the government, the chairman and other members appointed by the shareholders. Shareholders from a list drawn up by the supervisory Board.” - Australia: “APRA members determine APRA’s policies, ensures it performs its functions properly, efficiently, and effectively.” - Canada: “The Financial Institutions Supervisory Committee (FISC) … does not have a direct oversight role, but facilitates consultation and exchange of information among its members on all matters relating directly to the supervision of financial institutions. The FISC consists of the superintendent (chair), the Governor of the Bank of Canada, the Chairperson of the Canada Deposit Insurance Corporation, the Commissioner of the Financial Consumer Agency of Canada, and the deputy minister of finance.” - Relationship with the executive (finance ministry and government) (verbatim highlights): - United Kingdom: “The treasury appoints and removes the chairman of the FSA and appoints the chairman of the nonexecutive committee. The FSA submits an annual report to the treasury together with the report of the nonexecutive committee.” - Germany: “The President of the Federal Republic of Germany appoints the president and vice-president upon proposal by the federal government. The ministry of finance has oversight authority and it is required to ensure that BaFin executes its tasks according to the law.” - The Netherlands: “The member of the Supervisory Board appointed by the government may at the request of the finance minister or on its own initiative obtained from the Governing Board data and information about the manner in which the bank performs its tasks and communicate his findings to the minister of finance. The Minister can request DNB to provide data and information in connection with its tasks and activities as he deems necessary with the purpose of determining the government’s financial and economic policy.” - Australia: “APRA members are appointed by the governor general. One person is appointed as the chair. APRA is to regularly inform the government of APRA’s policies. The governor-general upon recommendation of the treasury, acting with the advice of the Federal Executive Council, may determine APRA’s policy in case of disagreement between the APRA and the government.” - Canada: “The superintendent is appointed by the government. The superintendent reports to the minister of finance from time to time on the administration of the legislation. The minister of finance can request public disclosure of information for the purposes of analysis of the financial condition of a financial institution.” - Relationship with parliament (verbatim highlights): - United Kingdom: “Treasury submits the FSA annual report to parliament. Parliament considers the report thru one of its committees (treasury select committee) and may received evidence from the treasury and the FSA.” - Germany: “Parliament is represented in the Administrative Board by five delegates.” - The Netherlands: “The president of DNB may be heard by the first or second chamber of parliament at their request. Members of parliament may address inquiries with respect to DNB to the finance ministry.” - Australia: “The treasurer is required to present APRA’s annual report to both houses of parliament and recommendations in case of disagreement between the Board and the government regarding APRA’s policies.” - Canada: “The minister of finance is responsible for OSFI and reports to parliament. The superintendent submits the annual report to the minister of finance, who presents it to parliament.” - Accountability toward stakeholders and the public (verbatim highlights): - United Kingdom: “Publication of annual report. Public consultation (consumers, practitioners) with respect of the exercise of rule making powers.” - Germany: “Publication of annual report. An Advisory Board (Fachbeirat) with representatives of the central bank, academia, financial industry, and consumer associations may make recommendations on the further development of supervisory practice.” - The Netherlands: “DNB publishes quarterly and annual reports on its activities. Publication of annual report. Representative organizations of supervised institutions are consulted by DNB on draft (changes of) legislation.” - Australia: “Publication of annual report. Consultations with industry and other interested parties with respect to regulations and prudential guidelines. Annual consultations with industry and representatives on budgets and assessments.” - Canada: “Publication of annual report. Consultations with industry and other interested parties with respect to regulations and prudential guidelines.” - Audit / budgetary accountability (verbatim highlights): - United Kingdom: “The treasury may commission independent financial reviews of the FSA.” - Germany: “The president submits draft budget to the Administrative Board for approval. At the end of the fiscal year, the president submits financial statements to the Administrative Board which approves with consent of the federal ministry of finance. Independent audit is carried out according to the charter of the BAFin. The audit report must be submitted to the president, the Administrative Board, the finance ministry and the Federal Financial Comptroller (Bundesrechnungshof).” - The Netherlands: “The general meeting of shareholders commissions an expert to audit the annual accounts. The expert presents the audit report and its opinion on the report to the Supervisory Board and the Governing Board. The annual accounts are signed by all members of the Supervisory Board and the Governing Board and are approved by the shareholders (the state). With respect to supervisory tasks: a draft budget is submitted by DNB to the ministry involved for approval, after prior consultation with representative organizations of supervised entities.” - Australia: “APRA submits an annual report to the treasurer with audited financial statements in accordance with orders made by the finance ministry. Note: The auditor-general conducts an independent audit of APRA and its opinion is published as part of APRA’s annual report.” - Canada: “OSFI budget requires the approval of the Treasury Board, although the section in the OSFI Act stipulating this does not apply in practice as OSFI’s expenditures usually do not exceed the total of assessments and revenues collected and moneys appropriated by parliament. Accounts are audited by the Auditor General of Canada.” - Source note: “Source: Respective national laws.” *Source: _wp0551 - REFERENCES (PDF chapter/section).* ### Part II ### _wp0551 - Part II ### Accountability Arrangements — Part II (Korea; Japan; Chile; Spain; Finland) - Institution - Korea: Financial Supervisory Commission (FSC). - Japan: Financial Services Agency (FSA) - Chile: Superintendency of Banks and Financial Institutions (SBIF) - Spain: Banco de España - Finland: Financial Supervision Authority (FSA) - Legal basis - Korea: Law of Establishment of Financial Supervisory Bodies 1999. - Japan: FSA Law, 2000. - Chile: General Banking Law, 1997. - Spain: Law on the Autonomy of the Banco de España, 1994. - Finland: Act on the Financial Supervision Authority. 2003. - Function - Korea: Supervision of financial institutions and securities markets. - Japan: Supervision of the banking, insurance, and securities industries. - Chile: Supervision and prudential regulation of banks and financial institutions. - Spain: Supervision of credit institutions. - Finland: Supervision and regulation of banks, stock, and securities markets. - Statutory objectives - Korea: - The FSC is responsible for the promulgation and amendment of financial supervisory rules and regulations. - The approval and permission for the business of financial institutions relating to their operations and for the deliberation. - And resolution of agenda with respect to any inspections, examinations, and sanctions on financial institutions, etc. - Establishing a stable and dynamic financial system. - Developing a state of the art financial system - Development and proper implementation of regulations to protect users. - Ensuring transparency and fairness in financial administration based on clear rules. - Enhancing the expertise and foresight of the staff and improving the administrative - Japan: - Supervise the State Bank, the bank and financial entities that are not supervised by another agency. - Issue instructions and adopt all measures necessary to correct irregularities in supervised entities to protect depositors, other creditors, and the public interest. - Watch over compliance of the supervised entities with laws, rules, regulations, and other legal notifications. - Monitoring and supervising credit institutions - Monitoring and supervision of the application of the legal framework governing the mortgage market. - Cooperation with the authorities entrusted with similar functions in foreign countries. - Chile: - Promoting financial stability and public confidence in the operation of financial markets. - Spain: - Statutory tasks of the FSA: 1) Supervising activities of supervised entities and financial market participants. 2) Directing financial market participants to comply with good practice. 3) Fostering public awareness of financial markets. - Finland: - (No additional bulleted statutory objectives listed in the provided excerpt beyond “Supervision and regulation of banks, stock, and securities markets.”) - Management structure - Korea: Nine commissioners consisting of the chairman, vice-chairman, one standing commissioner, and six non-standing commissioners. The chairman is the head of the FSC and the Financial Supervisory Service Board whose function is to represent the commission. The chairman is appointed by the prime minister. - Japan: Superintendent and intendents. - Chile: Governing body is composed of the governor, deputy governor, governing council and the executive commission. - Spain: Board composed of six members, i.e., four members appointed by the PSC, of which two on the proposal of the ministry of finance, one on the proposal of the Bank of Finland and one on the proposal of the ministry of social affairs and health. The director general of the FSA and director general of the insurance supervision authority are also included in the Board. The chairman and vice-chairman are selected from the members proposed by the MoF or BoF. - Finland: Direct oversight function (e.g., Supervisory Board) — The minister of financial services is in charge of managing the FSA’s operations. - Direct oversight / Supervisory Board arrangements - Korea: (No separate direct oversight body specified in this excerpt beyond management structure.) - Japan: Governing council is composed of the governor, deputy governor, six elected council members, the director general of the treasury and financial policy, the vice-president of the national securities market commission. The governing council approves general guidelines, internal rules, sanctions or proposed sanctions to be submitted to the minister, bank circulars, the budget, and the annual report. - Chile: The Parliamentary Supervisory Council (PSC) supervises the overall expediency and efficiency of the operations of the FSA. In addition, the PSC has oversight with respect to certain administrative matters. - Spain: (No separate direct oversight body specified in this excerpt beyond management structure.) - Finland: (See Japan entry where PSC oversight is described for Finland’s arrangements in this table.) - Relationship with the executive (finance ministry and government) - Korea: - Each commissioner is appointed by the President of the Republic of Korea. The commissioners are the deputy minister of finance and economy, deputy governor of the Bank of Korea, the President of the Korea Deposit Insurance Corporation, experts recommended by the minister of finance and economy, minister of justice and the President of the Korea Chamber of Commerce and Industry. - Japan: - The superintendent is appointed by the president of the Republic. The SBIF relates to the government via the ministry of finance. - Chile: - All members of the governing council are appointed by the government. The governing council approves the annual report to be submitted via the government, to parliament. A separate report is produced on banking supervision and after approval by the Bank’s decision making bodies it is sent to the government and Parliament. - Spain: - The director general is appointed by the President of the Republic. Two members of the Board are appointed on the proposal of the ministry of finance and one on the proposal of the ministry of social affairs and health. The ministry of finance is the principal agency for financial sector law-making. - Finland: - (No additional executive relationship beyond board appointment descriptions in management structure.) - Relationship with parliament - Korea: The minister is a member of the cabinet, appointed by the prime minister. - Japan: The bank sends an annual report to parliament on actions that have given rise to very serious sanctions and to interventions in supervised institutions. The governor can also appear before parliament to discuss supervisory issues. The estimated budget is sent to the government which submits it to parliament for approval. - Chile: The members of the PSC are appointed by the parliament. The FSA Board supplies the PSC with an annual report. In addition, the Board supplies the PSC with an annual report on achievement of objectives of FSA operations. In turn, findings are included in the PSC report to the parliament concerning the operations of the Bank of Finland. Thus the parliament gets a possibility to assess the functioning of supervisory and regulatory infrastructure and draw necessary conclusions. - Spain: (Annual reporting channels to government and parliament described under Relationship with the executive.) - Finland: (See Chile entry where PSC and parliament interactions are described for Finland’s arrangements in this table.) - Accountability toward stakeholders and the public - Korea: Publication of annual report. - Japan: Publication of annual report. - Chile: SBIF must inform the general public about the status of supervised institutions at least three times a year. - Spain: Publication of Bank of Spain’s annual report as well as the report on supervision. - Finland: - Publication of the annual report for the public. - Publication of the annual report for the PSC. - FSA newsletters (6 per year) to the public. - Open consultation on FSA regulations. - Publication of major FSA actions and decisions. - Audit / budgetary accountability - Korea: The ministry of finance and economy, the Bank of Korea, and the FSC may request and exchange information from each other. - Japan: The FSA is funded from the central government budget. - Chile: The SBIF provides information to the ministry of finance and the Central Bank of Chile about the supervised institutions. Accounts are audited by the general comptroller of the Republic. - Spain: The annual balance sheet and accounts of the bank, once approved by the government upon proposal by the ministry of finance and economy, is sent to parliament for information. - Finland: The financial accounts of the FSA are consolidated into the Bank of Finland financial accounts and are audited by auditors appointed by the PSC. The cost of the FSA activities are covered by fees received from the industry. *Source: Respective national laws.* --- ### Accountability Arrangements — Part III (Poland; Hungary; France; Italy; Switzerland) - Institution - Poland: Naradowy Bank Polski (NBP) - Hungary: Commission for Banking Supervision; Hungarian Financial Supervisory Authority (HFSA) - France: Ministre de l’economie et des finances (MINEFI). Comité des Etablissements de Crédit et des Enterprises d’Investissement (CECEI) Commission Bancaire (CB) Banque de France - Italy: Banca d’Italia - Switzerland: Swiss Federal Banking Commission (SBFC) - Legal basis - Poland: Banking Law of August 27, 1997. - Hungary: Act CXXIV of 1999 on the Hungarian Financial Supervisory Authority. - France: Code monétaire et financier Consolidated Act, 1993. - Italy: Federal Law on Banks, November 8, 1934. - Switzerland: (Legal basis entry given as “Federal Law on Banks, November 8, 1934.” in Italy row; Swiss-specific legal basis not provided in the excerpt.) - Function - Poland: Supervision of banks. - Hungary: Supervision and regulation of the financial services industry. - France: Licensing, supervision and regulation of credit institutions and securities firms. - Italy: Supervision and regulation of banks and financial intermediaries. - Switzerland: Supervision of banks, investment fund, securities exchanges and securities firms. - Statutory objectives - Poland: - To ensure the safety of funds held on bank accounts. - To ensure compliance by the banks with the provisions set by the Banking Law. - To promote the smooth operation of the money and capital markets. - To protect the interest of clients and financial institutions. - To enhance the transparency of markets. - To maintain a fair and regulated market competition through the permanent surveillance of the prudent operations of organizations and entities engaged in financial services. - Hungary: - Client asset protection. - Enforcement of applicable laws and regulations. - Financial soundness of banks and financial institutions-on a solo and on a consolidated basis. - Maintenance of market and systemic liquidity. - Sound and prudent management of the persons subject to supervision. - Overall stability of the financial system. - Efficiency and competitiveness of the financial system. - Compliance with the provisions concerning credit. - France: - To protect depositors and to maintain the trustworthiness and orderly functioning of the banking system in the public interest. - Italy: - To preserve the reputation of Switzerland as a financial centre. (Note: this line appears in the Italy column in the table excerpt; related Swiss objectives follow.) - Switzerland: - To protect the Swiss economy against exceptionally high outflows of capital. - To protect banks against excessive withdrawals of capital. - Management structure - Poland: The commission is composed of the chairperson, deputy chairperson, and five public officials. - Hungary: President and two deputy presidents. - France: Financial Security Act 2003 vested MINEFI with regulatory powers in the sectors of insurance, banking, and securities firms. MINEFI may adopt regulations following a consultative opinion of Comité Consultatif de la Legislation et de la Réglementation Financiéres (CCLRF). The CECEI, chaired by the governor of the Banque of France, is vested with the powers of licensing credit institutions and examining their shareholders. The CB, chaired by the Governor of the Banque de France, is vested with supervisory and disciplinary powers upon credit institutions. - Italy: Banking Supervision Department. - Switzerland: The SFBC is composed of seven to eleven members all appointed by the federal council. - Direct oversight / Supervisory Board arrangements - Poland: Management Board is composed of the chairperson and six to eight Board members of which two are deputy chairpersons of the NBP, appointed by the government. - Hungary: The supervision council has 15 members and the president of the HFSA is the chairman. Five members are appointed based on consultations with the minister of finance and 10 members are appointed based on consultations with professional associations. The council is an advisory body. - France: CB and CECEI are independent administrative bodies. There is no direct oversight body. Checks and balances help maintain their operational autonomy. - Italy: The interministerial committee for credit and savings is the highest authority for credit and the protection of savings. The chairman is the minister of the treasury and the other members are the minister of foreign trade, the minister for the coordination of agricultural food and forestry policies, the minister of finance, the minister for industry, the minister of public works and the minister for European community affairs. - Switzerland: (No separate direct oversight body specified; SFBC composition described under management structure.) - Relationship with the executive (finance ministry and government) - Poland: - The chairperson is the president of the NBP and deputy chairperson is a representative of the ministry of finance, Other members are representatives of the President of the Republic of Poland, the Bank Guarantee Fund, Securities and Exchange Commission, ministry of finance and the general inspectorate for banking supervision. Annual assessments on the financial condition of the banking industry are made available to the government (e.g., speakers of the Sejm, senate, central authorities and civil service agencies). - Hungary: - The prime minister elects two deputy presidents submitted by the minister of finance upon recommendation of the president of the supervision. The president of the HFSA reports to the government about its activities each year. - France: - The Governor of the Banque de France and the Head of the Treasury are appointed by the Council of Ministers. The MINEFI is appointed by the President of the Republic. All other members of CECEI and CB are appointed by the MINEFI. - Italy: - Members of the interministerial committee for credit and savings are appointed by the government. The minister of treasury can act in place of the credit committee in case of emergency. - Switzerland: - The SBFC is required to make its annual report to the federal finance ministry. The SBFC reports once a year to the federal council. The SBFC communicates with the federal council via the Federal Department of Finance. - Relationship with parliament - Poland: - The chairperson and deputy chairperson are both appointed by the Sejm at the request of the President of the Republic of Poland. The annual report is submitted to the Sejm. - Hungary: - Parliament elects the president on the prime minister’s proposal. The president of the HFSA, following the report provided to the government, informs the competent committee of parliaments about its supervision activities every year. - France: - The Governor of the Banque de France may be heard or may ask to be heard by parliament. The Banque de France sends annual reports to the president and to parliament. Each year the CCLRE sends the President of the Republic and the parliament (both houses) a report on the regulation of the banking and financial systems. Members of parliament participate to CCLRE sessions (both houses). CECEI and CB also publish annual reports. - Italy: - The SFBC furnishes an annual report to the legislature. The chairman and senior officials of the commission are required to appear before parliamentary committees when they discuss the report, although the minister represents the commission during the plenary session. - Switzerland: - (See Italy entry where annual reporting and committee appearance obligations are noted for the commission; SFBC furnishes an annual report to the legislature.) - Accountability toward stakeholders and the public - Poland: Publication of annual report. The CBS consults with the Polish Bankers’ Association for proposed technical changes to the structure of financial regulations. - Hungary: Publication of annual report. Two-thirds of the total members of the supervision council are appointed based on consultations with representative professional associations. - France: Publication of annual report for each institution. The CECEI includes representatives of the banking and financial community, and of consumers and of worker’s unions. - Italy: Publication of annual report on supervisory activities. - Switzerland: Publication of annual report. - Audit / budgetary accountability - Poland: The Superior Chamber of Control (NIK) audits the activities of the CBS and NBP. - Hungary: The HFSA is audited by the State Audit Office and its functions are supervised by the ministry of finance. Its accounts are part of the ministry of finance’s budget. - France: The CB and CECEI do not have separate balance sheets because their staff and resources are provided by the Banque de France. Banque de France’s accounts are certified annually by two different external statutory auditors. - Italy: (Audit arrangements not separately enumerated in the excerpt beyond standard reporting and committee mechanisms.) - Switzerland: The SFBC is subject to normal audit arrangements of government agencies. The federal council and the Federal Department of Finance may require special reports. *Source: Respective national laws.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp0551.pdf_