Regulatory and Supervisory Independence and Financial Stability

IMF Working Papers, March 1, 2002

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Regulatory and Supervisory Independence and Financial Stability

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Bibliographic details

• Authors: Michael W Taylor, Marc G Quintyn
• Published: March 1, 2002
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451846560.001

Summary and central argument

• Despite its importance, the issue of financial sector regulatory and supervisory independence (RSI) has received only marginal attention in literature and practice.
• Experience has demonstrated that improper supervisory arrangements have contributed significantly to the deepening of several recent systemic banking crises.
• The paper argues 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.
• Agency independence and accountability need to go hand in hand; the paper discusses a number of accountability arrangements.

Four key dimensions of RSI (regulatory, supervisory, institutional, budgetary)

• Regulatory: design of legal and rulemaking authority for financial sector regulators.
• Supervisory: operational independence and capacity of supervisory bodies to monitor and enforce regulations.
• Institutional: organizational arrangements that separate or define responsibilities among authorities.
• Budgetary: funding arrangements that ensure operational resources without undue political interference.
• The paper discusses ways to achieve each of these dimensions (details and specific mechanisms are presented in the full Working Paper).

Institutional arrangements to make independence work in practice

• Independence must be complemented by institutional arrangements that enable effective implementation.
• Key considerations include clearly defined mandates, operational autonomy, and mechanisms to secure required skills and resources.
• The paper emphasizes the practical interplay between independence and accountability in institutional design.

Accountability arrangements

• The paper discusses a number of accountability arrangements to accompany agency independence.
• Accountability mechanisms are presented as essential to ensure independence does not lead to unaccountable discretion.
• The balance between independence and accountability is highlighted as the key issue for effective RSI.

Subject areas and keywords

• 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
• Keywords: agency independence, Bank supervision, Banking Supervision, Central bank autonomy, Central Bank Independence, Financial Regulation, Financial sector, Financial sector stability, Global, government interference, government regulation, independence arrangement, monetary policy, reaction function, Regulatory Agencies, structural adjustment, supervisory agency, WP

Content in this bundle

• Regulatory and Supervisory Independence and Financial Stability - WP/02/46
  • Regulatory and Supervisory Independence and Financial Stability - WP/02/46 (Markdown version)
  • Regulatory and Supervisory Independence and Financial Stability - WP/02/46 (PDF)