IMF Working Papers

Regulatory and Supervisory Independence and Financial Stability

Author/Editor:

Michael W Taylor ; Marc G Quintyn

Publication Date:

March 1, 2002

Electronic Access:

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Summary:

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.

Series:

Working Paper No. 2002/046

Subject:

Bank supervision Banking Central bank autonomy Central banks Economic sectors Financial regulation and supervision Financial sector Financial sector policy and analysis Financial sector stability