Independence of the Financial Sector Regulators


Governor Gërguri’s speech at the Albania FSA’s International Conference: “Independence of the Financial Sector Regulators: Reemphasized”, October 31, 2012, Sheraton Hotel, Tirana

Dear Ms. Bakke
Dear Ms. Shehu,
Ladies and gentlemen,

I am pleased to be invited to speak to this important conference of different financial regulatory and supervisory agencies from our region. And, it is my second time being here within a week. Indeed, I was here last week at the conference organized by Bank of Albania and I am so glad for this unique opportunity to feel and be part of the festivity of 100th anniversary of Albanian independence.

I see  that I am an outlier in this conference not only as the only governor in this room but also as relates to the topic of this conference. Let me be direct, I am coming from an independent institution - the Central Bank of the Republic of Kosovo (CBK), which apart from traditional central banking functions is also in charge for licensing, regulation and supervision of all financial institutions in Kosovo. Subsequently, the independence that you are reemphasizing today as financial regulatory and supervisory agencies in Kosovo’s case has been provided to the banking, insurance, pension, securities, and other nonbank financial institutions regulators and supervisors through a single authority - the CBK. This “all in one” arrangement fits to the country’s profile and so far represents an advantage, especially bearing in mind that after recent global financial crisis everyone calls not only for more regulation and supervision but also for more coordination. However, we should not forget that having all regulators within one umbrella carries always some reputational risk that institution can be exposed. 

As the former speaker from Serbia indicated, the independence is not a goal in itself. Our institutions exist foremost to protect depositors, policyholders, pension contributors, etc. Therefore, I we have also to look also at the way we are delivering our agenda. Given that I come from an institution which in its structure contains both the central bank operations and the financial regulation and supervision, I will start my discussion from the view-point of the central bank independence. The mainstream arguments for an independent central bank are very well known to all of us and I believe there is no need to elaborate them now, especially after Ms.Bakke’s comprehensive outline of the definition of the independence.

However, nowadays, depending on the monetary and institutional arrangements in place, the arguments calling for central bank independence might have changed to some extent. The central banks with more limited monetary policy instruments (the cases of unilateral euroization, currency board, inflation targeting, fixed exchange rate), are to some degree less exposed to political pressure. Indeed, the experience of recent global financial crisis shows the opposite from we have been taught about the independence of the central bank. We have seen now that governors are calling ministers for money. However, it doesn’t mean that the importance of central bank independence has been reduced. Instead, it has taken a rather different character. Today, the need to have an independent central bank is primarily related to its function as a licensor, regulator and supervisor of the financial sector. Licensing, regulation and supervision of the financial institutions is equally important to be performed independently as it is with running the independent monetary policy.

In this context, I would like to stress out something not mentioned so far by previous speakers. First, I start with the key issue which is selection and nomination process for decision making bodies in our institutions. As relates to the Central Bank of the Republic of Kosovo, though a young institution, the selection process for all non-executive as well as executive board members goes through a competitive process. Simply, we are among the rare countries in the region and beyond where Governor is also selected through a public advertisement. Second, financial independence is condition sine qua non for real independence of regulatory and supervisory agencies. I am pleased to see that in most of your cases, the entities that you supervise do provide this important fundament for your independence. Third, it was mentioned this morning that after global financial crisis there is a call for more regulation and supervision. We all agree with that, but I would like to add that there is also a call for more and better coordination between independent regulators and other agencies. What is happening in the global economy is increasingly telling us that only an adequate interagency coordination may lead to more successful prevention and/or resolution of crisis. In this context, the understanding and demonstration of the independence should not result in a sort of thinking inside the box because this can be a serious obstacle to the interagency coordination. Fourth, we should improve our performance by demonstrating meticulously the well-known benefits resulting from being an independent agency (expertise, flexibility, credibility commitment, stability, efficiency, etc.). Our performance appraisal is linked to the way and the quality we are delivering our mandated agenda. We should continuously ask ourselves how much we understand the regulated entities, how fast we adjust to changes, and how much we contribute to the stability and predictability of the environment for our entities to operate. Our openness and transparency, our attention about consumers’ interest and rationalization of the cost of our operations are important pillars in safeguarding our independence. Getting independence is not a granted right, it has to be justified and demonstrated permanently. Our independence should be beneficial for regulated entities soundness. If we fail to provide above mentioned benefits, we can easily be seen as “an unelected fourth branch of government” (Majone, 1993). At the same time, if we go too far in promoting interests of regulated entities at the cost of those of consumers, we can be easily seen as “regulatory captured” (Stigler, 1971). In both cases, we risk to be formally or informally interfered by political controls in our decision making process. Therefore, we need to be not only independent but also highly competent institutions.
At the end, since we are short of time, let me emphasize another issue not mentioned in today’s discussions. It is about regulation versus supervision. We see tendencies to split between these two. To me a little bit unusual at the time when we call for more coordination and cooperation, more timely information and communication. In small countries like ours, I believe it is better to have both in one place, because we have seen that communication is crucial for prevention from instability and prompt reaction in case of emergency.
Finally, we should be sincere and acknowledge that independence of financial sector regulatory and supervisory agencies depends not only on the way how they demonstrate their independence but to grander degree on the quality of overall institutional environment in respective country.
Thank you!