Masciandaro, D. and Passarelli, F., (2013), “Single supervision and resolution rules: Is ECB independence at risk?”, VoxEU, 21 December.
During the Great Moderation, central banks focused on price stability, and independence was seen as crucial to limit inflation bias. Since the Global Financial Crisis, emergency support measures for banks, and central banks’ increasing involvement in supervision, have called central bank independence into question. This column argues that the literature has overlooked the distributional effects of the tradeoff between monetary and financial stability. In a political economy framework, heterogeneity in voters’ portfolios can cause the degree of central bank independence to differ from the social optimum.
A successful transition to a European Banking Union requires robust and credible ‘Chinese walls’ between the ECB’s role as monetary authority and any responsibility in the Single Supervisory Mechanism or in the resolution rules. Otherwise, the ECB’s independence would be at risk, given that monetary policy would likely have larger distributional effects.
In 2014, the handover of supervisory authority over most of Europe’s banking system to the ECB, and the ongoing debate over the European resolution scheme, require a clear acknowledgement of the possible effects on the central bank’s design and stability. These effects seem to be have been overlooked so far, and not just in the European case.
Since 2008, one of the main effects of the Global Financial Crisis has been the massive state interventions in bank bailouts and the consequent deterioration of public finances in many countries (Panetta et al. 2009). The instability in the financial system contributed, at least partially, to the instability of public budgets. This had, among others, two important consequences concerning the role of central banks. First, their duties in supervising the financial system have been redefined (Reis 2013). Second, their role as independent monetary authorities has been questioned (Taylor 2013). Both of these consequences result from a changed perception of the trade-off between monetary stability and financial stability.
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Relevant Posts
- Davies, H., (2013), “The Fox and the ECB”, Project Syndicate, 19 December.
- Münchau, W., (2013), “An exercise in prolonging a banking credit crunch”, The Financial Times, 22 December.
- Micossi, S., Bruzzone, G. and Carmassi, J., (2013), “The New European Framework for Managing Bank Crises”, The Centre for European Policy Studies, CEPS Policy Brief No.304, 21 November.
- Wolf, G., (2013), “Europe rightly pursues the road to a single resolution mechanism”, Bruegel, 27 November.