6. Regulatory Capture in Financial Supervision

Regulatory capture occurs when an industry has an excessive influence over the regulatory or supervisory processes. In the wake of the financial crisis of 2007-08, officials and academics could only observe that the prudential oversight of the financial industry has failed. This failure was soon attributed to regulatory capture and brought academics and officials to consider other channels of influence than traditional lobbying or corruption. With both theoretical and practical approaches, this chapter attempts to define regulatory capture, its normalization among the regulatory and supervisory framework and finally provides examples of the existing means regulators have to prevent it.