The political independence of banking regulators and supervisors is a key driver of global financial stability. Since the 2008 financial crisis, policymakers have prioritized reforms that insulate regulatory bodies from political influence. International frameworks—such as the Basel Committee’s core principles—stress the importance of supervisory independence. Institutions like the IMF and World Bank regularly evaluate this factor in their Financial Sector Assessment Programs. Yet, many countries still fall short of these standards.
Why Political Independence Matters
In politically driven environments, elected officials often seek short-term economic boosts. They may pressure regulators to loosen rules or relax supervision ahead of elections. These actions can stimulate credit growth temporarily but risk long-term instability.
Independent regulators, on the other hand, are free from political cycles. They can maintain a steady, long-term focus on financial soundness. This autonomy helps prevent regulatory manipulation and short-termism in financial policy.
Measuring Independence: A New Global Index
A recent study addressed the lack of strong empirical data by introducing a new index. This index measures the political independence of banking regulators and supervisors across 98 countries from 1999 to 2019. It evaluates independence in three core areas:
- Institutional Independence: How leaders of supervisory agencies are appointed, removed, and the length of their terms.
- Regulatory Independence: The ability to set and enforce rules without interference.
- Budgetary Independence: Control over financial resources without reliance on political bodies.
This index differs from traditional central bank independence metrics. It focuses specifically on banking oversight, which in many countries is managed outside the central bank framework.
Varying Levels Across Countries
The study found wide variation in regulatory independence among countries. Some maintain strong, autonomous systems. Others rely heavily on politically influenced structures. Central bank independence improved steadily during the early 2000s. However, the rise in supervisory independence was slower and less consistent.
Does Independence Improve Financial Stability?
To answer this question, researchers analyzed data from over 2,500 banks in 69 countries. Their findings were clear: higher regulatory independence correlates with greater financial system stability.
Banks under independent oversight showed lower levels of non-performing loans (NPLs). They also posted stronger financial indicators, such as higher z-scores and reduced volatility in return on assets (ROA).
Strong Results Across All Bank Types
These benefits applied across the board. The study found no significant difference between public and private banks, large or small institutions, or banks with or without political ties. Independent supervision consistently led to better financial outcomes.
Confirming the Link with Robust Methods
The researchers applied multiple controls and tests. They adjusted for bank size, capital levels, inflation, credit-to-GDP ratios, and cultural variables. They also used instrumental variables to confirm causality.
Even with these adjustments, the link between independence and stability remained strong. This consistency confirms that supervisory independence isn’t just theoretical—it has real, measurable impacts.
The Role of Institutional Structure
The broader structure of financial supervision also matters. Independence has a stronger impact when supervisory duties are housed within the central bank. However, when supervisors operate with too much unchecked power, the risk of regulatory capture increases. In such cases, private interests may influence outcomes, especially since the index focuses on independence from public—not private—influences.
During Crises, Effects Weaken—but Remain Relevant
The study also looked at performance during financial crises. While independent supervisors still performed better, the statistical impact was less pronounced. This suggests that, although RSI boosts resilience, it can’t fully protect systems during widespread external shocks.
Independence as a Strategic Imperative
The political independence of banking regulators and supervisors is not just good governance—it’s a strategic necessity. Countries that build independent, well-resourced regulatory bodies enjoy more stable financial systems.
In an era of increasing economic uncertainty, rising debt, and growing political polarization, strengthening the independence of financial oversight is more urgent than ever. Institutional autonomy should be at the core of any meaningful financial reform.