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Transparency of Banking Supervisors

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Abstract

Following Eijffinger and Geraats (2006), this paper constructs an index of transparency of banking supervisors that takes political, economic, procedural, policy, and operational transparency into account. Based on a survey, the index is constructed for 24 banking supervisors. The average score is 8.4 points (out of 15), whereas the minimum is 5.5 and the maximum 12 points. On average, political transparency is the highest in the sample, while procedural transparency is the lowest. The analysis suggests that it is very hard to identify factors that can explain the large differences in supervisory transparency, suggesting that country-specific developments drive transparency.

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Notes

  1. Lastra (1996) and Goodhart and others (1998) were among the first to stress the need for independence of supervisors. The Basel Core Principles for Effective Banking Supervision put the need for operational independence for bank supervisors in the first principle.

  2. Earlier, Siklos (2002) constructed a transparency index measuring released information by central banks.

  3. The papers that come closest to our research are Arnone, Darbar, and Gambini (2007), Masciandaro, Quintyn, and Taylor (2008) and Seelig and Novoa (2009). Our index will be compared in more detail with these studies in Section I.

  4. Currently, most supervisory authorities do not publish minutes, the FSA in the United Kingdom being the exception. However, as we intend to update our index frequently to examine how supervisory transparency develops over time, we have followed Eijffinger and Geraats (2006) and include question 9 even though it hardly discriminates between supervisors.

  5. Transparency about policy deliberations is only valuable if it occurs timely. In this case, we consider a period of eight weeks a reasonable amount of time.

  6. Announcement of formal interventions should take place within two weeks.

  7. As the authors kindly provided us with more detailed information, we were able to calculate the correlation of their five dimensions of transparency and our index of supervisory transparency. It turns out that only the correlation with the item referring to the mission statement is significant (the correlation is 0.48; p-value: 0.04).

  8. We have only included countries if the supervisor concerned responded to the questionnaire. For supervisors which did not respond we tried to construct the index ourselves based on the website of the institution. As this would make the results not comparable (see also footnote 9) we chose not to include the latter results.

  9. Indeed, the scores for those countries that did not reply to our survey but for which we gathered information from the supervisor's website were systematically lower than for countries that did reply to our survey.

  10. This applies, for instance, to APRA, the supervisory authority in Australia that at the time of the survey was preparing a publication on emerging issues and supervisory concerns on an industry basis. It also holds for the Federal Reserve Bank of New York, which publishes Board minutes, but only since December 2012 and with a delay of at least six months.

  11. Emerging markets in our sample are: Brazil, China, Hong Kong, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, Singapore, South Africa, and Turkey.

  12. We made one adjustment to the classification of Levy-Yeyati and Sturzenegger (2010). Slovenia has the euro since 2007 so we classify it as having exchange rate regime 1 instead of 4.

  13. Countries with relatively low regulatory capital are: Australia, Canada, China, France, Ireland, Italy, Japan, Netherlands, Norway, Slovenia, Spain, and Sweden. Countries that have experienced a banking crisis are: Belgium, Denmark, France, Germany, Indonesia, Ireland, Japan, Luxembourg, Netherlands, Russia, Slovenia, Spain, Sweden, China, Turkey, and the United Kingdom.

  14. By contrast in the Netherlands, the central bank—already the bank supervisor—took on additional prudential supervisory functions, while a second “peak” was established outside the central bank, the Authority for Financial Markets, in charge of the conduct-of-business supervision (see Kremers, Schoenmaker, and Wierts, 2003). According to Seelig and Novoa (2009), the practice of placing financial sector supervisors in central banks is particularly pronounced in Africa and Latin America. In our sample, in 14 countries the central bank is not responsible for supervision.

  15. In Brazil, Hong Kong, Indonesia, Ireland, Italy, the Netherlands, Russia, Singapore, Slovenia, and Spain, the supervisory authority is currently also responsible for monetary policy. Recent developments have not been taken into account in this grouping. Also note that in Ireland, Italy, the Netherlands, Slovenia, and Spain, the responsibility for monetary policy is different than in the other (non-EU) countries, as the governors of these five central banks have just one vote in the Governing Council of the European Central Bank.

  16. Inflation targeting countries are: Australia, Brazil, Canada, Indonesia, Norway, Sweden, Turkey, and the United Kingdom.

  17. There are both inflation-targeting and noninflation-targeting central banks among the most transparent central banks (Dincer and Eichengreen, 2009). Therefore we also compared the transparency of supervisors in high vs. low central bank transparency countries. There were no significant differences (results available on request).

  18. Countries with an integrated supervisor are: Australia, Belgium, Canada, Denmark, France, Germany, Ireland, Japan, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom.

  19. Countries with supervisors that take care of both prudential and market conduct supervision: Australia, Belgium, Canada, China, Denmark, Germany, Hong Kong, Indonesia, Ireland, Japan, Luxembourg, Norway, Singapore, Spain, Sweden, Switzerland, Turkey, and the United Kingdom.

  20. We have three of these countries in our sample: Denmark, Norway, and Sweden.

  21. The results for the other categories are insignificant and are available on request.

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Authors
  1. Franka Liedorp
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  2. Robert Mosch
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  3. Carin van der Cruijsen
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  4. Jakob de Haan
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Additional information

*Franka Liedorp is a senior policy advisor within the Financial Stability Division of De Nederlandsche Bank, Robert Mosch is advisor at the International Monetary Fund, Carin van der Cruijsen is an economist and researcher at De Nederlandsche Bank, and Jakob De Haan is Head of Research at De Nederlandsche Bank, Professor of Political Economy at the University of Groningen and research fellow of CESifo (Munich, Germany). The authors would like to thank Henk Brouwer for his support and Itai Agur, the editors and two referees for their very helpful comments on previous versions of the paper.

Appendices

Appendix I

The Index

This appendix contains detailed information on the banking supervision transparency index. The index is the sum of the scores for the answers to the 15 questions below (min=0, max=15). Note that all questions pertain to published information that is freely available.

Political Transparency

(1) Is there a formal statement of the objective(s) of banking supervision, with an explicit prioritization in case of multiple objectives?

No formal objective(s)=0.

Multiple objectives without prioritization=1/2.

One primary objective, or multiple objectives with explicit priority=1.

(2) Are all relevant supervisory laws and regulations, including those made by the supervisory authority, easily accessible to the public?

No=0.

Only the relevant laws/only the regulations made by the supervisory authority=1/2.

Yes=1.

(3) Are there explicit institutional arrangements or contracts between the supervisory authorities and the government?

No=0.

One positive answer=1/4.

Two positive answers =1/2.

Three positive answers=3/4.

Four positive answers=1.

Economic Transparency

(4) To what extent does the supervisory authority make information from the regular off-site financial reports of banks available to the public?

None=0.

Only key indicators (solvability, profitability) at an aggregate level=1/4.

Extensive information (for example, about market risks, operational risks, credit risks, leverage ratio) at an aggregate level=1/2.

Key indicators for (major) individual institutions=3/4.

Extensive reporting about (major) individual institutions=1

(5) Is the method the supervisory authority uses to come to a risk scoring of a bank publicly available; for example, which factors or risks does the supervisory authority look at when assessing a bank and how do these inputs lead to a scoring?

No=0.

Yes, but no explanation=1/2.

Yes, with explanation=1.

(6) To what extent does the supervisory authority inform the public about the outcomes of its risk assessments?

Not at all=0.

Only at an anonymous basis and/or at an aggregate level without explanation=1/4.

Only at an anonymous basis and/or at an aggregate level with explanation=1/2.

In individual cases (publishing name of bank) without explanation of case=3/4.

In individual cases (publishing name of bank) with explanation of case=1.

Procedural Transparency

(7) Has the supervisory authority a clear “supervisory strategy,” for instance a publicly available document that explains how the supervisory authority wants to reach its goals in the coming period, its priorities and/or main supervisory themes?

No=0.

Yes, but dispersed=1/2.

Yes within one document =1.

(8) Is there a publicly available explicit strategy for supervisory interventions; for example, is there an “intervention ladder” that links the outcome of the risk assessment to specific intervention actions?

No=0.

Yes, but no explanation=1/2.

Yes, with explanation=1.

(9) Does the supervisor give a comprehensive account of policy deliberations within a reasonable amount of time?

No=0.

Yes=1.

Policy Transparency

(10) To what extent does the supervisory authority inform the public about formal interventions, for example, issuing directions, issuing fines and replacing directors of financial institutions?

Not at all=0.

Only at an anonymous basis and/or at an aggregate level without explanation=1/4.

Only at an anonymous basis and/or at an aggregate level with explanation=1/2.

In individual cases (publishing name of bank) without explanation of case=3/4.

In individual cases (publishing name of bank) with explanation of case=1.

(11) Are decisions about formal interventions promptly announced?

No=0.

Yes=1.

(12) To what extent does the supervisory authority inform the public about formal nonsanctioning supervisory decisions, for example, granting of licenses, giving permission to mergers and acquisitions, doing fit and proper checks?

Not at all=0.

Only at an anonymous basis and/or at an aggregate level without explanation=1/4.

Only at an anonymous basis and/or at an aggregate level with explanation=1/2.

In individual cases (publishing name of bank) without explanation of case=3/4.

In individual cases (publishing name of bank) with explanation of case=1.

Operational Transparency

(13) Does the supervisory authority regularly report to parliament about reaching its targets, and if so, how often?

No=0.

Yes, but less than once a year=1/2.

Yes and at least once a year=1.

(14) Does the supervisory authority regularly publish an internal evaluation (self-assessment) of its functioning, and if so, how often?

No=0.

Yes, but less than once a year=1/2.

Yes and at least once a year=1.

(15) Is there a regular publicly available external evaluation of the functioning of the supervisory authority, and if so, how often?

No=0.

Yes, but less than once a year=1/2.

Yes and at least once a year=1.

Appendix II

The Survey

The goal of this questionnaire is to collect comparable data on the transparency of supervisory authorities around the world and thereby gain insight into the transparency practices of banking supervisors.

Clarification

  • Transparency means that information on a certain subject can easily be found by the public. In most cases, this implies that the website of the supervisory authority provides such information in a clear way. Regular publications, such as annual or quarterly reports, may also fulfill this task.

  • The focus of the questionnaire is on prudential supervision (as opposed to conduct of business supervision).

  • In case more than one authority is supervising banks in a country, the questionnaire relates to the authority that is primarily responsible for banking supervision.

Questionnaire

  1. 1

    Is there a formal statement of the objective(s) of banking supervision, please specify?

  2. 2

    Is there a clear prioritization in case of multiple supervisory objectives, please specify?

  3. 3

    Which of the following institutional arrangements are in place that strengthen the operational independence of the supervisory authority?

    1. a)

      The law does not give the government the right to intervene in policy decisions made by the supervisory authority

    2. b)

      The law defines clear criteria for dismissal of the president of the supervisory authority

    3. c)

      The supervisory authority does not need to submit the budget to the government for a priori approval

    4. d)

      The supervisory authority cannot be held liable for damages caused by its actions, or only in cases of gross negligence and willful misconduct

  4. 4

    Are all relevant supervisory laws and regulations, including those made by the supervisory authority, easily accessible to the public? Please specify.

    1. a)

      No

    2. b)

      The relevant supervisory laws only

    3. c)

      The regulations made by the supervisory authority only

    4. d)

      Both laws and regulations

    5. e)

      Other, please specify…

  5. 5

    To what extent does the supervisory authority make information from the regular off-site financial reports of banks available to the public?

    1. a)

      None

    2. b)

      Key indicators (solvability and profitability) at an aggregate level

    3. c)

      Extensive information (for example, about market risks, operational risks, credit risks, leverage ratio) at an aggregate level

    4. d)

      Key indicators for (major) individual banks

    5. e)

      Extensive information for (major) individual banks

    6. f)

      Other, please specify…

  6. 6

    Does the supervisory authority regularly publish forward-looking analyses of financial sector developments, and if so, how often? Please specify.

  7. 7

    Has the supervisory authority a clear “supervisory strategy,” for instance a publicly available document that explains how the supervisory authority wants to reach its goals in the coming period, its methodology (for example, risk-based or not, cooperative or repressive, principle or rule-based), its priorities and/or main supervisory themes? Please specify. If yes, is this information available in 1 document?

  8. 8

    Is the method the supervisory authority uses to come to a risk scoring of a bank publicly available; for example, which factors or risks does the supervisory authority look at when assessing a bank and how do these inputs lead to a scoring? Please specify.

  9. 9

    Is there a publicly available explicit strategy for supervisory interventions; for example, is there an “intervention ladder” that links the outcome of the risk assessment to specific intervention actions? Please specify.

  10. 10

    To what extent does the supervisory authority inform the public about formal interventions, for example, issuing directions, issuing fines and replacing directors of financial institutions?

    1. a)

      Not at all

    2. b)

      Only at an anonymous basis and/or at an aggregate level without explanation

    3. c)

      Only at an anonymous basis and/or at an aggregate level with explanation

    4. d)

      In individual cases (publishing name of bank) without explanation of case

    5. e)

      In individual cases (publishing name of bank) with explanation of case

    6. f)

      Other, please specify…

  11. 11

    To what extent does the supervisory authority inform the public about formal nonsanctioning supervisory decisions, for example granting of licenses, giving permission to mergers and acquisitions, doing fit and proper checks?

    1. a)

      Not at all

    2. b)

      Only at an anonymous basis and/or at an aggregate level without explanation

    3. c)

      Only at an anonymous basis and/or at an aggregate level with explanation

    4. d)

      In individual cases (publishing name of bank) without explanation of case

    5. e)

      In individual cases (publishing name of bank) with explanation of case

    6. f)

      Other, please specify…

  12. 12

    To what extent does the supervisory authority inform the public about the outcomes of its risk assessments?

    1. a)

      Not at all

    2. b)

      Only at an anonymous basis and/or at an aggregate level without explanation

    3. c)

      Only at an anonymous basis and/or at an aggregate level with explanation

    4. d)

      In individual cases (publishing name of bank) without explanation of case

    5. e)

      In individual cases (publishing name of bank) with explanation of case

    6. f)

      Other, please specify…

  13. 13

    Does the supervisory authority regularly publish an internal evaluation (self-assessment) of its functioning, and if so, how often? Please specify.

  14. 14

    Does the supervisory authority regularly report to parliament about its functioning, and if so, how often? Please specify.

  15. 15

    Is there a regular publicly available external evaluation of the functioning of the supervisory authority, and if so, how often? Please specify.

  16. 16

    In case you have any additional comments, please add them here.

Appendix III

Table A1

Table A1

Table A1 Correlation Analysis
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Liedorp, F., Mosch, R., van der Cruijsen, C. et al. Transparency of Banking Supervisors. IMF Econ Rev 61, 310–335 (2013). https://doi.org/10.1057/imfer.2013.11

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