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Governance of central banks at risk

The post-crisis mandate of central banks may jeopardise their independence, accountability and effectiveness, says Tsuyoshi Oyama, a partner of at Deloitte Touche Tohmatsu.

March 08, 2011 | Tsuyoshi Oyama

As political independence is an essential feature of central banks, which should thereby receive only indirect supervision by their main stakeholders—i.e. the government—of their activities, the governance of central banks is expected to have stronger autonomous error-correction mechanisms than other organizations. For this reason, the missions of central banks are usually defined clearly enough for external parties to assess their performances relatively easily, and their missions are typically narrowed down to managing price stability whereby they can be assessed by some simple measures, such as the difference between targeted and actual inflation rates.

Such simple-looking central bank mandates, however, have changed with the coming of the financial crisis, which caused central banks in many countries to be more deeply and explicitly involved in the work of stabilizing their overall financial systems, in cooperation with other regulatory agencies. This new mission presents central banks with enormous governance challenges, as it could conflict with their mission of price stability. Furthermore, the new mission might facilitate the intervention of politicians into their activities and thus jeopardize their political independency, a long-assumed mantra of the governance of central banks. 

Massive amounts of liquidity provided by major central banks in 2008 and 2009 in order to dispel the concerns of market liquidity evaporation has threatened price stability in some countries. Recent quantitative easing (QE) policies initiated in some major economies to buoy the macro-economy require central banks to purchase unorthodox risky assets, which are not assumed as liquid assets under the Basel III liquidity regulation. This implies the possibility that future QE could not produce the expected effects due to the constraints of Basel III after its implementation.

Accountability has not yet kept pace with central banks’ business expansion e...

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Regulation, Risk And Regulation Working Group