Independent agencies: more than a cheap copy of independent central banks?

The rise of independent regulatory agencies (IRAs) confronts governments with new challenges. More specifically, it raises the twin issue of (democratic) legitimacy of both the IRAs and of the delegating government once a large number of key areas of policymaking are moved outside its direct control. So, the effectiveness of IRAs depends on their interactions with the other branches of government and on governance arrangements that provide the right incentives to all stakeholders involved. To identify such models, this paper first reiterates the history of independent central banks, the prototype IRA. The main lesson from is that the independent central bank model is characterized by an independence-bias and that there is a growing realization that more attention needs to go to the entire governance model, as opposed to simply independence. Based on this lesson, the paper proposes a governance model for IRAs based on independence, accountability, transparency and integrity to provide the right incentives to all stakeholders. The last part of the paper empirically illustrates how policymakers are currently dealing with two of these four pillars—independence and accountability—when redesigning financial sector supervisors. More specifically we show that the virtuous interaction between independence and accountability is not (yet) always well understood.