Independent Regulatory Agencies’ Black Sabbath?

A guest post by Martino Maggetti:

Mr. Osborne, the Chancellor of the Exchequer of the United Kingdom, recently announced the dismembering of the Financial Services Authority. The watchdog was publicly blamed for its alleged “light-touch” regulatory approach and failure to prevent the financial meltdown.

From 2012, its competencies will be separated between a number of new and old agencies. The Bank of England will assume not only monetary policy, but also “macro-prudential supervision”, that is, the responsibility for systemic risks oversight and regulation. In addition, a Consumer Protection and Markets Authority will ensure the “integrity” of financial markets, while a new Prudential Regulatory Authority “will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies”.

This is quite a spectacular institutional development. The FSA is an independent regulatory agency (IRAs) which employs more than 2,500 people and possess important regulatory powers. It regulates a crucial sector of a leading country, which is widely recognized as a trend-setter in regulatory governance.

Can we interpret this decision as a signal for paradigmatic shift, eventually leading to a process of de-agencification, which could spill over other countries and sectors? It is too early to say. However, a number of elements would suggest that policy makers will rather reinforce regulatory governance by IRAs. First, new public sector-specific agencies are being created. Second, IRAs, together with governments, were the key players in the aftermath of the financial crisis. Third, the solution to the problem is politically framed in terms of more intense regulation.

What is under pressure is a specific model of regulator. If we take the British case as a forerunner, it appears that the performance of integrated supervisors with broad and consolidated competencies – fiercely independent from the ministry but holding informal linkages with the regulated industries – proved to be not up to expectations. Structural weaknesses stemming from unclear objectives and extended moral hazard seem to surpass efficiency gains (Abrams and Taylor 2000).

And yet, this particular institutional arrangement diffused rapidly from the 1990s (Cihak and Podpiera 2008). Fully integrated financial supervisory agencies increased from one in the 1980s to around 40 today. This anecdotic evidence confirms once again that establishment of regulators did not follow a rationale of instrumental learning, but rather an emulation process whereby their symbolic properties were more important than actual effectiveness (Gilardi 2008).

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