Independence and Accountability in Supervision: Comparing Central Banks with Financial Authorities

Unlike the monetary policy function – nowadays, invariably the core function of a central bank – the financial supervisory function is being performed by a variety of institutions for whom there is less consensus about the governance model than for central banks. This chapter sheds light on recent trends in, and determinants of, financial supervisory governance, with special attention to the position of the central bank. We first identify similarities and differences in the theoretical approaches to the two key features of governance for central banks and supervisors – independence and accountability. We then disentangle empirically the institutional differences between supervisory regimes governed by central banks and other institutional arrangements. The analysis of the determinants of independence and accountability arrangements for supervisors indicates that (1) the quality of public sector governance plays a decisive role in establishing accountability arrangements, more than independence arrangements; (2) politicians' decisions regarding the degree of independence and accountability seem to be driven by different sets of considerations; and (3) the likelihood for establishing governance arrangements suitable for the supervisory task seems to be higher when the supervisor is located outside the central bank