Accountability of financial supervisory agencies: An incentive approach

Abstract

Financial supervisory failure is often mentioned as one of the causes for the recent financial crisis. A possible explanation of this failure can be found in the absence of adequate incentives for financial supervisors. In the literature, accountability is considered an important mechanism to ensure that financial supervisors perform their supervisory role with adequate care. In this article I examine, using the insights from Law and Economics, to what degree accountability contributes to adequate financial supervision by examining the impact of the consequences of being held accountable on the behaviour of financial supervisors. The article shows that, from a Law and Economics perspective, it is unlikely that the existing accountability arrangements give the Dutch financial supervisors sufficient incentives for performing their supervisory role with adequate care. Given the fact that financial supervisors in Europe will more or less face the same consequences from being held accountable, it is likely that the outcome of this research will also apply to them.