Inside and Outside of the Central Banks: Independence and Accountability in Financial Supervision -Trends and Determinants

Abstract

This paper analyzes recent trends in, and determinants of, financial supervisory governance inside and outside central banks. We first identify similarities and differences between this emerging strand in the literature and the central bank independence literature in order to frame the econometric work on the determinants of independence and accountability. We then calculate the levels of supervisory independence and accountability in 55 countries, disentangling similarities and differences among central banks and pure financial supervisors. Finally the empirical analysis indicates that the quality of public sector governance plays a decisive role in establishing accountability arrangements, more than independence arrangements. It also shows that decisions regarding levels of independence and accountability are not well-connected. The results also show that the likelihood for establishing governance arrangements suitable for supervision are higher when the supervisor is located outside the central bank.