25: Regulatory Independence – It’s not Just about Institutions

Working paper number: 25

 

Financial regulators perform inter alia a quality control function, as they search for recession-generating flaws in the financial system. Some groupings of regulations operate more or less independently to other groupings, as is the case when different agents – not necessarily different institutions – examining the same regulatory issues or monitor the same behaviours independently. We refer to these clusters as Independent Dimensions of Regulation (IDRs). They may appear inefficient if the same issue is explored repeatedly. However, statistical independence in this context can rapidly reduce the probability of crises. If quality control regulations are dependent, policymakers should make them more independent.