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Regulation Best Practice

How Much Independence for Supervisors in Financial Market Regulation?

by Marc Quintyn

Executive Summary

  • The degree of political independence that financial supervisors should enjoy is a hotly debated topic.

  • This is because financial supervisors are a “one of a kind” breed of regulatory agency. They supervise the sector that is at the heart of the allocation of capital in any society, and therefore attract much political interest, not only in normal times, but even more so in times of crisis.

  • While a fair degree of independence is justified—institutionally, in their regulatory and supervisory work, and financially—independence alone will not establish the right incentive structure for supervisors.

  • Agency independence is not a goal in itself. It is just one institutional arrangement that should assist in establishing a governance framework that provides the regulatory agency with the right incentives to discharge its delegated powers. The other three elements are accountability, transparency, and integrity.

  • Accountability arrangements ensure that the agency maintains legitimacy towards its stakeholders. This legitimacy will support independence, as will accountability.

  • Transparency and integrity arrangements play an important role in making independence and accountability effective.

  • These four elements of regulatory governance keep each other in equilibrium, and together establish the right incentives for the agency to fulfill its mandate, and for its stakeholders to refrain from interfering.


The concept of independence, and, in particular, political independence is loaded. In a principal–agent relationship, it is associated with (more) power for the agent and a loss of power or grip for the principal. While the notion of an independent central bank is now more or less generally accepted in democratic societies, the broader notion of independent regulatory agencies (IRAs)—agencies that regulate and monitor important parts of social and economic life on behalf of government—is slowly gaining acceptance.

Financial sector supervisors are a “one of a kind” regulatory agency among these IRAs, and the debate about their independence is fairly recent, i.e., since the late 1990s and the turn of the century. Financial supervisors possess some unique features among IRAs that complicate the discussion about their degree of political independence. They are close to the central banks in that they contribute to preserving a country’s financial stability by monitoring the health of individual institutions. Yet they differ from most other IRAs (central banks, competition regulators, and utilities regulators) in a number of crucial ways. Most importantly, they monitor a sector that fulfills a central role in the economy as allocator of capital, and as a source of governance for the corporate sector. For these very reasons, the sector has always generated much attention from the political class. This political interest, which is also eagerly exploited by the sector itself, opens the door to constant attempts at political interference and lobbying.

Add to this uniquely distinguishing feature (i.e., the nature of the sector they supervise) a number of other specific characteristics in the content of their supervision job, and it is clear why the independence of financial supervisors is such a much-debated issue. These other characteristics are:

  • their mandate contains a great number of contingencies;

  • given the sensitivities inherent in the workings of the financial system, transparency in their supervisory operations needs to be weighed against confidentiality more than in any of the other types of regulators;

  • they wield wide-ranging judicial powers which include “the coercive power of the state against private citizens,” which is more far-reaching than for any other type of IRA.

These features lead to two conclusions regarding their independence. First, a fair degree of regulatory and supervisory independence is needed to insulate them from both political and industry interference and lobbying. Second, and equally important, given their job content, the granting of independence alone is most unlikely to provide the right incentive structure to financial supervisors. In order to fulfill their mandate properly, independence arrangements need to be designed in coordination with other features, which together establish a regulatory governance structure that provides the right incentives to the supervisors, as well as to the other stakeholders, in particular their political masters.

Such an incentive-compatible governance structure for financial supervisors should be built around elements of independence, accountability, transparency, and integrity. These four ingredients of a governance framework, if designed properly, tend to reinforce each other, as we shall demonstrate. In the next section, we substantiate the need for supervisory independence, and the subsequent section presents an incentive-compatible regulatory governance framework.

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Further reading


  • Bovens, Mark. “Public accountability.” In E. Ferlie, L. Lynne, and C. Pollitt (eds). The Oxford Handbook of Public Management. Oxford: Oxford University Press, 2004.
  • Das, Udaibir, and Marc Quintyn. “Financial crisis prevention and crisis management—The role of regulatory governance.” In Robert, Litan, Michel Pomerleano, and V. Sundararajan (eds). Financial Sector Governance: The Roles of the Public and Private Sectors. Washington, DC: Brookings Institution Press, 2002.
  • Quintyn, Marc, and Michael Taylor. “Robust regulators and their political masters: Independence and accountability in theory.” In Donato Masciandaro, and Marc Quintyn (eds). Designing Financial Supervision Institutions: Independence, Accountability, and Governance. Cheltenham, UK: Edward Elgar, 2007.


  • Hüpkes, Eva, Marc Quintyn, and Michael Taylor. “The accountability of financial sector supervisors: Theory and practice.” European Business Law Review 16:6 (2005): 1575–1620.
  • Kydland, Finn, and E. Prescott. “Rules rather than discretion: The inconsistency of optimal plans.” Journal of Political Economy 85:3 (1977): 473–491.
  • Majone, Giandomenico. “Strategy and structure: The political economy of agency independence and accountability.” Designing Independent and Accountable Regulatory Agencies for High Quality Regulation: Proceedings of an Expert Meeting in London, Organization for Economic Cooperation and Development, January 10–11, 2005: 126–155.
  • Quintyn, Marc, Silvia Ramirez, and Michael Taylor. “Fear of freedom—Politicians and the independence and accountability of financial sector supervisors.” IMF Working Paper 07/25, Washington, DC: International Monetary Fund, 2007. Also in Donato Masciandaro, and Marc Quintyn (eds). Designing Financial Supervision Institutions: Independence, Accountability, and Governance. Cheltenham, UK: Edward Elgar, 2007.
  • Quintyn, Marc. “Governance of financial supervisors and its effects—a stocktaking exercise.” SUERF Studies (2007/4): 64
  • Rogoff, Kenneth. “Optimal degree of commitment to an intermediate monetary target: Inflation gains versus stabilization costs.” Quarterly Journal of Economics 100 (1985): 1169–1189.
  • Williamson, Oliver. “The new institutional economics: Taking stock, looking ahead.” Journal of Economic Literature 38:3 (2000): 595–613.

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