Central banks
Central banks
Powerful, political and unaccountable?
The economic and political importance of central banks has grown markedly in advanced economies since the start of the Great Financial Crisis in 2007. In this article it is argued that the preservation of the central bank’s legitimacy and independence requires that a clear line be drawn between the central bank’s provision of liquidity and the Treasury’s solvency support for systemically important financial institutions. Central banks should not be materially involved in regulation and supervision of the financial sector. All activities of the central bank that expose it to material credit risk should be guaranteed by the Treasury. In addition, central banks must increase their accountability by increasing the transparency of their lender-of-last-resort and market-maker-of-last resort activities. Central banks ought not to engage in quasi-fiscal activities. Finally, central banks should stick to their knitting and central bankers should not become participants in public debates and deeply political arguments about matters beyond their mandate and competence, including fiscal policy and structural reform.
Keywords: Banking, Quasi-fiscal, Independence, Legitimacy, Accountability, Regulation, supervision
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