Expect greater collaboration between the central bank and regulator in Switzerland. They have signed a memorandum of understanding saying they will work more closely together in future.
The two bodies worked more closely during the financial crisis, and fell in love found some common ground. Principal changes/ how it will work:
Imagine walking down the high street, cash in hand, to place your savings into your local deposit bank. Now imagine going to a different bank to check on your loan balance. And a third bank to find out about insurance. Each bank only offers a specific service: they are local and they do not compete with each other.
Such a set-up would redefine the concept ‘bank’.
By Tom Braithwaite
Democrats led by Barney Frank on Tuesday slammed a proposal to grant additional consumer protection powers to the Federal Reserve, as the latest idea designed to unlock talks in the Senate appeared destined for the scrap heap.
Argentina’s expected co-operation with the government has been confirmed explicitly by the central bank president and the economy ministry. Bank president Mercedes Marco del Pont told reporters that the Banco Central will co-ordinate its policies with the country’s Economy Ministry, while economy minister Amado Boudou announced the formation of a new economic council, which will group officials from both institutions.
Focus at the central bank will be on company output rather than inflation, said Ms Marco del Pont: “We want to focus on price stability but from a different, non-orthodox view, from the supply side.” Annual inflation is running at 32.1 per cent, according to a report by Graciela Bevacqua, the former head of the consumer price department at the national statistics institute.
“It makes little sense to extend the mandate of monetary policy to include financial stability. Flexible inflation targeting, applied in the right way and using all the information about financial factors that is relevant for the forecast of inflation and resource utilization at any horizon, remains the best-practice monetary policy before, during, and after the financial crisis.”
This from the deputy governor of Sweden’s central bank, Lars Svensson, addressing the Mumbai-based central banker conference last week. He observed that using interest rates and targeting inflation were not sufficient to ensure financial stability. But he did not conclude from this that central banks should widen their targets or toolkits.
Just what should central banks do? Their role is increasingly being debated, often with the banks themselves seeking to expand their remit beyond price stability. But the Bank of Japan seems to be bucking the trend: governor Masaaki Shirakawa has said that deflation cannot be stopped by the Bank of Japan alone.
The comments follow a call from Japan’s finance minister, who said he wants 1 per cent inflation, and called on the Bank of Japan to do more. “I personally would like to see growth of around 1 per cent [in CPI], or perhaps even a little more,” Naoto Kan told a lower house budget committee. “I think the BoJ shares the government’s view that this is a desirable policy goal,” he said, adding that how best to achieve the goal was up to the central bank to decide.
Sweden’s central bank is the latest to ask whether financial stability should be added to its list of goals. The Riksbank has proposed a formal review, to include “whether it should be explicitly stated … that the Riksbank has a responsibility for financial stability”.
A similar question was raised at a central banker conference on Friday by India’s central bank governor Dr Duvvuri Subbarao. The significance of the question is great: price stability was previously thought necessary – and perhaps even sufficient – for financial stability. Now there is a growing belief that there might be a trade-off between the two.
Should central banks persist with inflation-targeting? “The crisis has given fresh impetus to the ‘new environment hypothesis’ that pure inflation targeting is inadvisable and that the mandate of central banks should extend beyond just price stability,” Dr Duvvuri Subbarao said today.
The Indian central bank governor argues that price stability does not ensure financial stability. In fact, he says, there is a trade-off between the two, and “the more successful a central bank is with price stability, the more likely it is to imperil financial stability.”
Well done to the Swedes. While the world frets and dithers about house price bubbles, the Swedish central bank has come up with a plan. In less than a year, a new commission will report back on all you could wish to know about Swedish housing bubbles: what makes them likely; what pops them; what tools are – or should be – available to combat them; and whether Swedes are currently in one.
The report will focus on residential property, although the (better studied) commercial property sector will be included. The commission will be run from within the central bank by heads of the monetary policy and financial stability departments. A related conference will be held in the autumn of this year and the final report is expected no later than January 31, 2011.
It’s a bit like a prenup: the European Central Bank is encouraging the Irish government to grant its central bank a veto over its intended life partner, the financial regulator.
Legislation is currently being drawn up that will effectively re-merge the central bank and the regulator. But the ECB says the central bank governor should be granted an “explicit” right to veto the regulator’s funding and budget decisions, if they infringe his independence.
Draft legislation may be reviewed this month. Finance Minister Brian Lenihan has yet to work out how the board would be arranged, and precisely how incumbent governor, Dr Patrick Honohan, and regulator, Matthew Elderfield, would work together.