Regarding the current policy discussion on whether central banks should be tasked with banking and financial market supervision, I think it is important to involve central banks and tap into their in-depth knowledge base. At the same time, it is key to maintain the institutional independence of the ESCB. While this could be done, at least to some degree, by a strict division of different tasks within the institution itself, personally I sympathize with the idea to also transfer supervision issues to an independent institution that it is free from political pressure and election cycles. In my view, the financial crisis has shown that some contributing factors were actually caused by deliberate policy initiatives (e.g. the availability of mortgages to low-income families in the US in order to boost home-ownership, which eventually ended in the sub-prime debacle).
Elga Bartsch is Chief European Economist of Morgan Stanley in London
The recovery comes along nicely--as evidenced by the latest PMI readings-- broadly in line with my earlier expectations. The outlook for near-term inflation is benign and bank credit extension especially to companies remains lacklustre. At the same time, however, risk appetite is returning in financial markets and could drive another financial asset price bubble in due course, if left unchecked. Against this background, the present policy stance seems still right for the time being, but some action may be required before too long. When risk appetite becomes excessive, we may eventually need to consider a refi rate increase as a warning shot to financial markets. Although I would at present not expect this to happen within the next 6 months I believe the time is near to introduce a spread between the main and long-term refi rate. I want to propose a 25bp spread for the 1-year refi rate in December, to be "pre-announced" at the November meeting (e.g., "Council sees the case for introducing a small spread between rates of MRO and 1-year LFO in future operations.")
Thomas Mayer is Co-Head of Global Economics of Deutsche Bank in London
Until the crisis, I was strongly against putting central banks in charge of bank supervision, for all the usual reasons but chiefly a potential conflict of interest. If they fail to detect trouble in time, they are almost certainly to lend in last resort. Their credibility is also at stake. But having seen how supervisors badly failed, I changed my mind. Supervisors failed for two main reasons. First, they are largely incompetent. Second, they are a branch of government and therefore subject to capture by political interests. Central banks, on the other hand, usually have a high-quality staff and independent enough to resist pressure from vested interests. The ESCB, in particular, has no reason to protect a particular country's banks ("protect" here explicitly refers to protectionism, of which we have seen plenty of evidence). I am well aware of the dangers involved in taking that step but the disaster of the crisis and the all-too-visible reluctance of governments to now adopt serious regulatory reforms (as evidenced by the spat between Mervyn King and Gordon Brown) shows that it is impossible to leave supervision under government control. The Germans are right and set an example to follow.
Charles Wyplosz is economics professor at the Institute of Graduate Studies, Geneva
I read Thomas's comments on the need for the ECB to announce a 25bp spread on the next long-term financing operation. I do think that he has a point but for now, I will reserve my judgment until I hear other arguments.
There are two sub-questions on the issue of central banks' role in supervision. One is about the role of the ECB and the other about the role of national central banks. It makes sense for the ECB to have at least some supervisory role. First, the crisis has shown that the current set-up is ill-suited to deal with many of the banks operating in Europe who have a significant presence in several countries. The pan-European nature of the ECB gives the institution a privileged position to deal with such issues. Second, the crisis has illustrated the need for more and better macro-prudential supervision. Here again, the ECB seems the natural body to deal with such issues since it already has many of the required skills in-house. Third, as illustrated in the past 1-2 years, the ECB's balance sheet is used to support the banking sector. It makes sense for the ECB to be able to act before banks get in so much trouble that they need massive support. At the national level, I think it also makes sense for central banks to have supervisory functions to provide the necessary national detail to the ECB's pan-European analysis. Such increased power and responsibilities implies that central banks should be explicitly tasked to ensure not only price but also financial stability. The case for keeping some supervisory role outside central banks mainly rests on the fact that in case of bail-out taxpayers' not central banks' money would be used. I do not think that this justifies keeping an entire institution separate from the central bank.
Marie Diron is Senior Economist of Oxford Economics in London
I think the lines between monetary and fiscal policy are already blurred, and in my view the ECB is the central bank that would benefit the most from taking over or sharing supervisory responsibilities. To the extent that a systemically important bank is at risk of collapse, it endangers the macroeconomic outlook and therefore poses a downside risk to the inflation target that the central bank cannot ignore. In such a situation, it is probably preferable if it is the government that steps in, but in any case the central bank should have the information, and it should have a say in the setting of the prudential requirements. There are two lessons of the crisis that argue in favor of involving the ECB in supervisory responsibility: First, within the Eurozone, the banking systems that fared better were those regulated by independent central banks rather than government agencies; and second, in the early stages of the crisis the ECB was clearly hampered by lack of information on the state of the banking system, due to the fragmentation of supervisory responsibilities along national lines. This to me suggests that in the Eurozone context it would be particularly beneficial to have the central bank involved in supervisory responsibilities
Marco Annunziata is Chief Economist of Unicredit in London
I think that central banks should get more power in oversight of the banking system for exactly the reaons Charles Wyplosz outlines . But there is still one fundamental problem to be solved. If central banks decide on the acivity of banks these are potentially subject to legal objections. These may lead to court decisions that are binding for central banks. How is this compatible with the independence of central banks?
Ragarding rates, the ECB should make an announcent that it will cut rates if the US- Dollar continues its fall. I believe the Dollar will continue to fall so that the ECB in the end may be forced to lower rates. There is no inflationary bias to be expected within the next three months. Business activty will continue to be more or less close stagnancy. No selfsustaining upswing is in sight within the next three months.
Gustav Horn is Scientific Director of IMK Institute in Düsseldorf
I think the ECB should start making clear that the unlimited liquidity support for the banks will end in December. The systemic risk has diminished substantially, and those banks who are still in need of exceptional liquidity support should now be copnsidered as insolvent, not iliquid, and thus taking over by the governments and either intervened or closed down. Monetary policy should not be hostage to the inability of governments to adopt the right policies to deal with their banking sectors.
On the merits of central banking and supervision, I have mixed feelings. On the one hand, monetary policy can benefit from direct access to information about the stability of the financial system. On the other hand, the LORL action of central banks will always put them in difficult situations that could later endanger their crediblity and ability to run appropriate monetary policies. The tremendous political attacks on the Fed are a case in point.
Angel Ubide is Chief Economist of Tudor Investment Corp. in Washington DC