Autonomy vs Accountability: Rethinking the Role of Financial System Regulators

In every country, financial regulators play an important role in keeping the economy safe and stable. Financial regulators are responsible for ensuring banks follow the rules, manage risks, maintain price stability, interest rate stability, and maintain foreign exchange stability. To make these regulators fair and liable, two important questions arise: Should these regulators be independent and make decisions on their own? Or should they be more closely watched and guided by the government?

This article looks at both sides of the debate—why independence is important, and why accountability also matters.

Why do some say the regulator should be independent?

Independence can be needed for regulators because sometimes the government gets driven by its own motive to retain its image rather than the welfare of the financial system. The government can easily get distracted by its own motive to gain public applause. The government tries to achieve positive results that support the short-term political agenda, these positive results can be a disaster for long-term economic stability. This pattern of decision making can only benefit to a temporary government at the cost of economy of a nation. Political influence can also lead to frequent switch in regulator official due to which it can cause slow functioning of financial system. That is why, financial system should be left autonomous.

Financial system’s regulators are expected to be independent in three aspects;

1. Goal interdependence
2. Instrumental independence
3. Operational interdependence

Goal interdependence

For example primary goal of central bank is to maintain macroeconomic stability; price stability, foreign exchange stability, interest rate stability and to implement monetary policy for sustainable economic growth. To maintain price stability central bank tend to take any step in order to control impact of inflation on economy. Even though action of central bank can invite recession, it does carry it out to control inflation. Whereas government may not allow risk of recession or sudden rise in interest rate due to its own motive or belief.

Between 2021 and 2022, the Central Bank of the Republic of Turkey ( CBRT), implemented several interest rate cuts under the pressure of RecepTayyipErdogan’s president of Turkey because of his belief. Because president  described interest as ‘the mother and father of all evil’. This led to depreciation of Turkish lira and inflation. Basic items like bread became increasingly unaffordable. This is how interference of government can bring disaster on economy.

Instrumental independence

Central bank should be allowed to operationalize instrument independently such as setting interest rate or conducting open market operation. For example a government can set 8% economy goal on fiscal policy which can only be achieved through money supply which is done by central bank through monetary policy. Monetary policy cannot just increase money supply as it can increase inflation. This is how interference of government can hinder financial system healthy flow.

According to the European Central Bank, a strong correlation exists between central bank independence and lower inflation rates. Countries with higher degrees of central bank independence tend to have more stable inflation, as independent central banks can make decisions based on economic indicator rather than political consideration.

Operational interdependence

Operational role of regulator includes day-to-day implementation, rules antilegal framework development and implementation. In context of Nepal regulators cannot implement legal framework independently. Legal framework needs to be first approved by related ministry then it is sent to councils of Ministers. This is a lengthy process due to which regulators of Nepal has been functioning according to legal framework developed 20 years back.

The International Monetary Fund emphasizes that operational independence is important for policy formation and implementation. Their Central Bank Transparency Code outlines practices to enhance transparency and accountability, reinforcing independence.Independent regulators are also more trusted by investors and international markets. They can make hard decisions without worrying about politics, and this helps keep the financial system stable.

Why Others Say Regulators Should Be Accountable?

On the other hand, some argue that regulators should not have too much power without oversight. These critics say that regulators are not elected by the public, so they must be monitored to make sure they are acting in the public’s best interest.

To be regulator of financial system independent it needs to have;

1. Public acceptance
2. Efficiency

Public acceptance

Public trust is closely linked to perceptions of transparency and accountability. Regulators needs to operate with transparency and are held accountable, it helps to build public confidence and support their independence. Without transparency and public trust regulator should not be left independently without accountability. If a regulator makes a mistake or enforces unfair rules, there must be a way to question or change their decisions. Politicians, courts, and the media can play a role in holding regulators responsible. This makes the system more fair and transparent.

Also, financial regulation affects everyone—not just banks and big investors. So it’s important that the rules reflect public values and social priorities, not just technical or market-focused thinking.

Efficiency

An efficient regulator not only enforces rules effectively but also builds credibility and trust, which are essential for maintaining autonomy from political and industry pressure. For less justification to political entities regulator must function efficiently.

The IMF publication claims independence for a stable financial system regulator should be paired with strong accountability to ensure responsible and fair conduct. The authors clarify that accountability and independence are not opposite, they are complementary.

Alan Greenspan’s leadership is one of the great example that reflects strengths and challenges of central bank independence. While he maintained autonomy in decision-making, his example also shows the need of transparency and critical evaluation of regulatory actions.

Finding the Right Balance

Rather than choosing full independence or full control, many experts believe in a mixed or “hybrid” approach. In this system, regulators can make decisions without political interference, but they also report regularly to the government or parliament, explain their actions to the public, and follow clear rules.

For example, a central bank might be free to raise interest rates on its own, but it must publish reports and answer questions from elected officials. This way, it stays independent—but not unchecked.

Conclusion

Financial regulators are essential for a strong economy. They help to prevent crises, protect consumers, and make sure banks follow the rules. But with great power comes great responsibility. That’s why we need to rethink how regulators work. They need enough freedom to do their jobs well, but also enough oversight to stay fair and accountable. A smart balance between autonomy and accountability is the key to keeping the financial system safe and trusted by all.

(The writer is in her final semester of a BBA Finance program at Little Angels’ college of Management, Kathmandu University)

REFERANCE

Aljazeera. (2021, December 13). in turkey, bread lines grow longer as inflation soars.

IMF. (2024, June 14). central bank independence: why it’s needed and how to protect it.

Katseli, L. T., Theofilakou, A., &Zekente, K. (2019). Central Bank independence and inflation preferences: New empirical evidence on the effects on inflation. SSRN Electronic Journal.https://doi.org/10.2139/ssrn.4197851

Quintyn, M., & Taylor, M. (2004).undefined. International Monetary Fund.