What is a Useful Central Bank? Stefan Ingves Norges Bank 18 November, 2010
Presentation Overview • Crises as drivers for change: Nordic crisis in the 1990s and the recent global crisis. • Riksbank: Changes in organization, tasks and governance • The nexus of monetary policy, financial stability and macro-prudential regulation
Crisis to crisis Inflation targeting regime Bank-/ Currency crisis €-referendum Financial crisis Formal independence 1990 1995 2000 2005 2010 NEW MANAGEMENT New cashstructure MPR FSR Outsourcing statistics Competence shift Down-sizing Reorg. fewer depts. Governance reforms
Organization • Pre-1990: Operational tasks and detailed regulation predominated. • Trading room – to maintain stable exchange rate. • Printing and distributing notes
Post-Crisis Organization • No more fixed exchange rate, no in-house regulation • Outsourcing several activities • New monetary policy – inflation targeting • Gradually increasing focus also on financial stability • Accountability, openness and confidence • Moral suasion rather than hard tools.
Changes in Staffing • From 1100-1200 (750 excluding companies) to 350 current. • 70 percent have academic degree and there are 50 PhDs. • Clear focus on core activities.
Governance • From hierarchy to a flat organization. • A six person Board, mainly to ensure broad discussion on monetary policy. • Drawing a line between policy decisions and other tasks. • Ideally, no involvement by Board in day-to-day management • International issues are totally integrated
Governance reforms: a day at the office for a deputy governor 2000 • ”Executive Director” responsible for IT-, Administration- and Market Operations Departments 2004 • Responsible for ”preparing” stability issues for the board. Heading the financial stability coordination group. 2010 • No particular responsibility for any specific part. Contributes to policy discussions and policy decisions and communicates them to the public.
Heads of dept., decide on… • All issues related to the day-to-day running of the respective department The Management committee .. • Co-ordination of all issues of relevance across the bank (such as rules and regulations, salaries, budget allocation and operational plan, follow-up, projects…) • Chaired by the Head of the General Secretariat • Weekly meetings • Regular reporting to the Executive Board
Conclusions from the global crisis • Clear links between monetary policy and financial stability • Regulation and supervision – first line defence • Both regulation and monetary policy affect borrowers’ loan costs.
Regulation vs. Policy Rate • Leaning against the wind • No contradiction between ”leaning” and stabilising inflation and the real economy… • … but some challenges (e.g., identifying a leverage cycle). • Monetary policy is rather blunt; regulations can be more specific towards the financial sector.
Challenges for Regulatory Design • Finding the balance between increased regulatory costs and reducing the risk and cost of crises. • Time-varying regulation is an interesting tool • Should central banks merge with supervisory authorities to improve coordination and efficiency? • Choices for central bank governance on monetary policy vs. financial stability.
Countercyclicalcapital buffer:1 Sweden Vertical shaded areas indicate the starting years of system-wide banking crises. 1 The countercyclical buffer is 0 when the value of the credit/GDP gap is below 2, and 2.5 when it is above 10%; for gaps between 2 and 10% the buffer is calculated as 2.5/8 times the value of the credit/GDP gap exceeding 2%. Source: BIS calculations.
Financial Stability: a Riksbank task? • Before 1990: No authority assumed responsibility for overall financial stability analysis. • The supervisors need to focus on micro-supervision. • How to formulate a mandate on FS? Currently: ”…promote a safe and efficienct payment system” • Do we need an extension of our independence?
Why is FS a Central Bank Task • Link to monetary policy • Link to large value payment system operated by central bank • Preparedness to provide ELA presupposes knowledge about overall situation of system.
The Global Crisis Showed Need to Review FS Work • Scope: Include more institution categories • SIFIs pose larger problems than previously expected • Liquidity developments are key • Contagion between submarkets and jurisdictions.
Crisis Experiences for Central Banks • Be prepared for large and sudden demands for liquidity support, incl in foreign exchange. • Review our framework for ELA • Focus more on liquidity vulnerabilities in cross-border banks • Clarify the roles and mandates of the authorities in crisis management.
Tools for FS • So far: Only communication and moral suasion. • The Riksbank is analyzing its need for tools. • Some tools could be held at the Finansinspektionen – to be called on by the Riksbank. • There is no conflict between MP and FS, but we need focused tools for FS.
An Example: The Riksbank Would Have Needed Tools to Stem Unsustainable Lending from Swedish Banks in Latvia Utlåningen (vs), index 100=2003, Bytesbalansen (hs), procent av BNP Källa: Reuters EcoWin
External Evaluation of the Riksbank • 2006: First external evaluation of the Riksbank’s monetary policy during the preceeding five years. • 2011: Second evaluation, by Goodhart and Rochet. Will include both MP and FS, including our mandate, competencies and instruments for conducting FS work.
Final Words • Current trends on staffing will continue: Fewer but more qualified. • Governance issues: Seeking the optimal solution for MP, FS and their interdependence • This is my thinking on how to become ”a useful central bank”. Thank you.