02 March 2022

SSM: Supervisory independence and accountability

It is a pleasure to be here, and I would like to thank the organisers for inviting me. I have spent over thirty years of my career in central banking and supervision. I was head of banking supervision at Finansinspektionen (the Swedish Financial Supervisory Authority), and a monetary policymaker for Sveriges Riksbank (the Swedish central bank). I now serve on the Supervisory Board of the European Central Bank. With that in mind, it should come as no surprise to you that today I would like to discuss an important precept of modern central banking: institutional independence and accountability.

And I would like to address this issue in the context of supervision. While central banks often – but not always – perform a supervisory function, far more attention is given to the need for accountability and independence in their monetary policy function. That is why I hope to persuade you that the question of supervisory independence and accountability, while less discussed, is certainly no less important. To anticipate the thrust of my argument, I would like to highlight four key messages.

First, while the principle of supervisory independence has been broadly accepted for many years now, it has been more difficult to apply in practice than the classical independence of central banks in the monetary policy domain. Supervisory independence should therefore continue to be “nurtured” so it can make up ground. However, policymakers and legislators should be aware of the specificities of the banking supervision function when designing independence and accountability frameworks.

My second message is that independence and accountability are two sides of the same coin – one cannot exist without the other. While it is sometimes suggested that accountability is a necessary “counterweight” to independence, I believe that framing this question as a zero-sum game essentially amounts to a false dichotomy. Rather than seeing independence and accountability as mutually exclusive, they should be seen as mutually reinforcing.

However, for this to be the case, independent and accountable frameworks need to be underpinned by clear institutional mandates and well-defined reporting and oversight structures. This is my third message. The more clearly defined institutional mandates are through measurable objectives, the easier it will be for the supervisor to explain whether it has delivered on its goals. There may still be some room for improvement for both supervisors and legislators in this regard, even if the ultimate policy goals of banking supervision are more difficult to measure than those of monetary policy. In addition, having adequate reporting and oversight structures in place makes it easier for legislators and the public to hold the supervisor to account, as well as enhancing the supervisor’s ability to communicate in a transparent and effective manner. Coupled with clear institutional mandates, this means that sound accountability structures are supportive rather than detrimental to the supervisory function.

The fourth message concerns the potential governance modalities around the supervisory function and whether this authority should be vested with the central bank or elsewhere. While each model has advantages and disadvantages, my personal view is that the synergies arising from combining under one roof the monetary policy and supervisory function outweigh the potential downsides of this option, and that adequate safeguards could be put in place so that both functions smoothly co-exist. This view is also influenced by my experiences as a policymaker, not least during the coronavirus (COVID-19) crisis, during which monetary policy and banking supervisory measures taken by the ECB have worked in the same direction to alleviate the economic fallout from the pandemic.

Let me elaborate on these key messages, while also drawing on the practices and arrangements in Europe regarding the ECB.

Central bank and supervisory independence: one and the same?

Central bank independence is nowadays widely accepted as an essential tenet of modern central banking, also thanks to the advocacy role played by institutions such as the International Monetary Fund (IMF) for many years. As is well known, the baseline case for central bank independence stems from the “time inconsistency problem” inherent in monetary policy – or that policymakers might be tempted to use monetary policy in a distortionary way. This is because money creation will have short-term positive effects on growth and employment, while the costs in terms of higher inflation will only accrue over the medium to long term. Shielding the central bank from direct political interference under a rules-based approach towards monetary policy in pursuit of price stability is thus seen as an efficient way of keeping this policy trade-off at bay.

The idea of central bank independence for the conduct of monetary policy was first floated in academic circles during the early 1960s, gaining traction in official policy circles during the late 1970s and early 1980s^[1] as many advanced economies struggled with the problem of stagflation. During the 1990s, the policy consensus around this idea firmed, and by the end of that decade central banks in almost all advanced economies and in many emerging economies had been granted independence, albeit in varying degrees^[2], coupled with policy accountability.

Although central banks were already heavily involved in banking supervision at the time, the idea of extending independence to the bank supervisory function per se (or granting independence to the banking supervisory authority if different from the central bank) took longer to come to fruition than it did for monetary policy. For example, in the run-up to the global financial crisis of 2008, there was still no clear provision for supervisory independence in the Treaty on the Functioning of the European Union, nor about what this would mean or require in concrete terms.^[3] This contrasts with the well-defined provisos for central banks in the monetary policy domain which already existed at the time, with the Treaty stipulating that the primary objective of the European System of Central Banks (including that of the ECB) was to maintain price stability and granting those institutions independence in achieving that goal.^[4]

However, to be fair we should also note that as far back as 1997, the Basel Committee’s core principles for banking supervision^[5] already highlighted that supervisors required “operational independence” to effectively carry out their tasks. I am pleased to say that this concept is now broadly accepted, and here again institutions such as the IMF and the World Bank have been instrumental in promoting compliance with best practices across their membership. However, my point is that, even when independence was recognised as an important organising principle of supervision during the period before the global financial crisis, its relatively generic formulation at the time meant that the interpretation of what this concept entailed in practice could vary from country to country. In this respect, it is important to keep in mind that the Basel Committee’s concept of operational independence was first developed when banking supervision in some key G10 jurisdictions was housed at the ministry of finance.

Moreover, despite the progress made since then, recent studies suggest that compliance with this principle is still not widespread at a global level^[6]. In a European context, a recent report by the European Banking Authority suggests that while the concept of supervisory independence has been heavily influenced by authorities being housed within, or with close ties to, central banks that have long-established independence requirements, there is still scope for greater clarity on personal independence as well as further consideration of what is required to ensure the independence of financial and staff resources while ensuring accountability^[7]....

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