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Central bank independence works differently for monetary policy and banking supervision

Summary:
Nice speech by Yves Mersch of ECB. He says we need to think differently about independence when it comes to banking supervision and regulation: As mentioned earlier, we need to differentiate between how the principles of independence and accountability apply in the central banking context on the one hand, and in respect of the ECB’s supervisory tasks on the other[13]. The wording of Article 130 of the Treaty makes it clear that the principle of independence concerns the performance of ESCB tasks conferred upon the ECB by the Treaty itself, that is, central banking–related activities. I therefore share the view that this Article cannot be applied equally to the exercise of the ECB’s supervisory functions, which were assigned to the ECB through secondary EU legislation rather than by

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Nice speech by Yves Mersch of ECB. He says we need to think differently about independence when it comes to banking supervision and regulation:

As mentioned earlier, we need to differentiate between how the principles of independence and accountability apply in the central banking context on the one hand, and in respect of the ECB’s supervisory tasks on the other[13].

The wording of Article 130 of the Treaty makes it clear that the principle of independence concerns the performance of ESCB tasks conferred upon the ECB by the Treaty itself, that is, central banking–related activities. I therefore share the view that this Article cannot be applied equally to the exercise of the ECB’s supervisory functions, which were assigned to the ECB through secondary EU legislation rather than by the Treaty,[14] and were intended for purposes other than the pursuit of the price stability objective.

Whereas the ECB has fully autonomous regulatory and decision-making powers when conducting monetary policy,[15] its discretion in carrying out its supervisory tasks is confined by the decisions taken by European and national legislators or regulators. Moreover, the ECB has a different and higher degree of accountability for its supervisory tasks than for its monetary policy task. This is because taxpayers may be affected by the way in which microprudential supervision is conducted, notwithstanding the intention under the new EU banking resolution regime for the costs of bank failures to be borne by the bank shareholders and creditors.

I in no way question the necessity for banking or financial supervisors to be operationally independent from undue political, commercial banking or other third-party influences. My point is that the degrees of independence that the ECB enjoys as a monetary policy authority on the one hand, and a banking supervisor on the other differ: both the source of independence and the ECB’s role are different in the two functions. And for these reasons, independence in the monetary policy function is stronger and more firmly embedded in the EU institutional framework than it is in the case of the supervisory function.

Hmm..

Most of the time, people are mixing these two aspects of central bank independence.

He also mentions that there are four kinds of independence (when it comes to mon policy):

ECB independence consists of four important pillars – institutional, functional, personal and financial independence.

Article 130 of the Treaty is the most important provision from the perspective of independence, guaranteeing institutional independence.[2] It works in two ways. First, it prohibits the ECB, the NCBs and the members of their decision-making bodies from seeking or taking instructions from EU institutions or bodies, from any Member State government or from any other body when exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties. Second, it stipulates that EU and national authorities must respect this independence and not seek to influence the members of the ECB’s or the NCBs’ decision-making bodies in the performance of their tasks.

The second pillar of independence is functional independence. The ECB has been given the autonomy to determine which policy tools to use to achieve its primary objective of price stability. It has sole competence to decide which means and instruments are most appropriate to help it achieve its aims – such as outright purchases, the establishment of the collateral framework, and the designation of its counterparties. As part of this functional independence, NCBs must have the necessary means and instruments to achieve the ESCB’s objectives independently of any other authority.

The third pillar of independence, personal independence, safeguards the capacity of the members of the ECB’s decision-making bodies to take decisions without external influence. The members of the ECB Executive Board are appointed for a non-renewable term of eight years[3] and can only be removed from office by the Court of Justice in two cases: if they no longer fulfil the conditions required for the performance of their duties or if they have been guilty of serious misconduct[4]. The Treaty requires that the NCB statutes provide for a minimum term of office of five years for the NCB governors[5]. These governors, too, may only be relieved from office in the aforementioned cases[6]. The Treaties also provide a powerful judicial remedy against arbitrary dismissals allowing the ECB and the governors to refer a dismissal to the Court of Justice of the European Union.

Even if central banks are fully independent from an institutional, functional and personal point of view, their overall independence would be jeopardised if they did not have sufficient financial resources to fulfil their mandate. The ECB therefore has financial independence, meaning that it is free to manage its own finances and ensure that it has sufficient capital, staff and income to perform its tasks independently.[7] For their part, NCBs may not be deprived by their governments of sufficient financial resources to carry out their tasks.

Hmm..

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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