Good governance on the part of financial sector regulators is increasingly recognized as an essential building block of financial stability. In a recent address to the International Association of Deposit Insurers in Seoul, Korea, Stefan Ingves, head of the IMF’s Monetary and Financial Systems Department, underscored this point, stressing that the quality of regulations and supervisory practices, including the treatment of bank closures, has a critical role to play in ensuring the stability of the financial sector.
Ingves noted that good regulatory governance is rooted in four essential institutional components—independence, accountability, transparency, and integrity—which reinforce each other in guaranteeing sound governance practices. For instance, accountability makes independence effective, transparency enhances the effectiveness of the three other elements, and independence and integrity are also mutually reinforcing.
The joint IMF-World Bank Financial Sector Assessment Program (FSAP) provides a means to collect information on governance practices, albeit mainly in an indirect way—by assessing country observance of several financial sector standards and codes. The assessment of nearly eighty countries to date, Ingves acknowledged, reveals that there is a lot of work ahead to improve governance practices in supervisory agencies.
The FSAPs reveal that the governance practices of the supervisory functions are generally weaker than those of the monetary policy functions. Less than 50 percent of the agencies assessed are reasonably independent from the government. Some form of accountability arrangement is present in most cases, but the standards and codes, in their current form, do not request the type of information needed to assess the quality of those arrangements. Transparency and integrity arrangements are satisfactory in only 60 percent of the countries assessed. In general, advanced countries score better than transition and developing countries on all accounts. But transition countries score better than developing countries, mainly because their institutions were reshaped in the 1990s.
In recognition of the importance of good governance, post-FSAP technical assistance is increasingly focusing on improving the institutional basis for good governance. The current trend toward unified supervisory structures, Ingves concluded, offers a great opportunity to strengthen governance practices as part of a comprehensive reorganization.