Executive Summary
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The degree of political independence that financial supervisors should enjoy is a hotly debated topic.
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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.
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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.
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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.
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Accountability arrangements ensure that the agency maintains legitimacy towards its stakeholders. This legitimacy will support independence, as will accountability.
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Transparency and integrity arrangements play an important role in making independence and accountability effective.
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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.
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