What is a Useful Central Bank?

Stefan IngvesNorges Bank

18 November, 2010

What is a Useful Central Bank?

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

Bank-/ Currency crisis

Crisis to crisis

1990

1995

2000

2005

2010

Inflation targeting regime Formal

independence

Financial crisis

Governance reforms

New cashstructure

Competence shift

Reorg. fewer depts.Down-sizing

FSR

€-referendum

Outsourcing statistics

NEW MANAGEMENT

MPR

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.

Staff development (FTE:s)

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Subsidiaries

Riksbank

Staff allocation – Competence Shift

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

”Executive Director” responsible for IT-, Administration- and Market Operations Departments

2000

2004

2010

Responsible for ”preparing” stability issues for the board. Heading the financial stability coordination group.

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

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

The Management committee ..

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.

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Countercyclical capital 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.

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80 85 90 95 00 05

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

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Utlåning Bytesbalansen

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.