Regulation assessers should have independence: CIFR
The usefulness of a proposed regulation or one suggested for removal should be judged in terms of its independence from other regulatory measures, an academic believes.
Associate professor of economics at University of Technology Sydney, Dr Gordon Menzies, proposes the independent dimensions of regulation (IDR) framework, and gives the example of a central bank and an institutionally prudential regulator that both examine the same set of systemic stability matters.
In a Centre for International Finance and Regulation funded study, Menzies proposed that the two regulators can represent two IDRs if the data and methodologies are different enough where if one regulator missed a financial systemic issue, the other could still find it.
"Another example might be two independent areas of the same regulatory organization performing stress tests on the same bank, but using different assumptions and examining different data. This shows that institutional independence is neither sufficient nor necessary for statistical independence," he said.
Menzies believes this method of finding errors in regulation will significantly reduce the chances of missing negative shock from the banking system as there will be more independent checks.
"Conversely, the probability of a shock balloons as check numbers are reduced."
Independent reviewers might come to different conclusions, which might be a good sign, as everyone coming to the same conclusion could indicate a lack of independence, Menzies argued.
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