Accountability Arrangements for Financial Sector Regulators

Marc Quintyn, Eva Hüpkes, and Michael Taylor

• Publisher: INTERNATIONAL MONETARY FUND
• eBook ISBN:
  9781589064775
• Year: 2006

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Accountability Arrangements for Financial Sector Regulators

Why are policymakers reluctant to grant independence to the agencies that regulate and supervise the financial sector, despite mounting empirical evidence that independence makes for a healthier financial system?

First, if not structured properly, independent regulatory and supervisory agencies (RSAs) could become an unelected fourth branch of government that is not subject to the same checks and balances as the executive, legislative, and judicial branches. Because supervisory actions often involve issues that are highly political—such as a decision to save or to close a bank—and can also affect individual property rights, making them independent might seem to be too great a delegation of authority.

Second, many policymakers are concerned about the possibility of “regulatory capture”—that, without proper political oversight and control, regulators will promote industry interests over those of the public.

Third, self-interest may play a role in policymakers’ reluctance to relinquish their oversight over the financial sector. In many parts of the world, the political class still sees the financial system as a vehicle for generating rents, campaign contributions, or bribes and for implementing redistributive policies (directed and connected lending) that can make them popular with voters. Politicians may thus try to remain formally or informally involved in financial sector regulation and supervision instead of delegating these responsibilities to an independent agency.

To the extent that the reluctance to grant independence to RSAs lies in a genuine concern about ensuring that the agencies remain subject to constitutional checks and balances, the solution is to make financial regulators fully accountable for their actions. However, adopting accountability arrangements has been difficult in practice, because accountability is an elusive, multifaceted, and complex concept, and—even more important—because accountability is often seen as synonymous with control, and thus as incompatible with independence. Indeed, many mistakenly believe that there is a trade-off between independence and accountability, whereas, in reality, well-structured accountability arrangements for RSAs are fully consistent with, and supportive of, independence and good governance.

The relationship between accountability and independence

The uneasiness with granting independence to RSAs is based on confusion about accountability and its relationship to independence. Independence is a straightforward concept that is relatively easy to define. In statutes and laws, an agency’s independence usually means that it does not accept directives from the government. Accountability is a more elusive and less easily defined concept. This elusiveness has obstructed efforts to include concrete and workable accountability arrangements in the legal framework governing financial regulators.

Coming to grips with accountability and its relationship with independence requires the clarification of a few princip...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Preface
• Accountability Arrangements for Financial Sector Regulators
• Biography
• The Economic Issues Series