As an example, it is more difficult to propose needed regulatory measures at the same time as promoting the growth of the financial market. To sum up: A country should be able to manage independence, accountability, transparency and efficiency satisfactorily in any kind of supervisory structure. For independence there might be some advantage with central bank supervision. But for cooperation leading to better efficiency there might be a slight advantage with a unified authority. Arguments for and against various supervisory structures After having discussed the conditions for good supervision let me now review some of the arguments for and against the various actual supervisory structures. I will first address the issues of having supervision inside or outside the ministries and the central banks. I will then turn to the arguments for and against unified authorities. Supervision inside ministries may provide some benefits in the form of insight and staff expertise, maybe also access to resources. But there is a strong disadvantage in the lack of independence plus the risk to the public’s confidence in the government if failures should occur in the supervised sector. There is also a serious governance issue in those countries where the government is the owner of financial institutions and also supervises them. Arguments for retaining supervision in the NCB What about supervision inside the NCB? First, banks have a special importance in the financial system. Their activities are often complex. Therefore, they need high quality, resource-intensive supervision. The NCB normally has independence and revenues.
Ensuring the safety and stability of banks and securities firms requires different regulations and skills from monitoring market conduct and taking enforcement actions. Ireland, France, Finland and others have retained bank supervision in an organisation closely related to the central bank but not in the central bank itself. In this way they benefit from the resources of the NCB and can make some cost savings, but avoid some of the arguments against locating supervision in the NCB itself. Other countries, among them Germany, have a stand-alone authority for financial regulation but the central bank maintains a role in the conduct of supervision by conducting most of the on-site inspections of banks. In this way the Bundesbank benefits from its vast network of regional branch offices and its knowledge of the local economy. Criteria for evaluating the organisation of supervision The choice of structure for supervision is not an end in itself but a means to achieve certain objectives. We should therefore analyse the conditions that must be in place to ensure good supervision. The first one is operational independence. There must be laws to prevent policy makers or financial market participants from trying to influence the operational decisions of the supervisor. Independence also implies sufficient and stable resources to attract skilled staff, to build good IT-systems, and to inspect supervised entities. The head of supervision should be independently appointed and should not be dismissed for other reasons than those provided in the law.