June 14, 2011Central Bank Governance and Financial Stability ...
The recent financial crisis has raised important questions about the role of the central bank in financial stability policy and how the execution of such a function influences the central bank's governance. Central bank governance and financial stability, a report released today by the Central Bank Governance Group, explores these questions.
Produced by a study group of central bankers chaired by Stefan Ingves, Governor of the Sveriges Riksbank, the report explores the implications of the crisis for the financial stability mandates of central banks. The report focuses on the governance arrangements needed for the effective and sustainable conduct of core monetary policy functions in combination with an additional mandate to contribute to financial system stability.
It concludes that: central banks must be involved in the formulation and execution of financial stability policy if such policy is to be effective; whatever the central bank's financial stability mandate is, it needs appropriate tools, authorities and safeguards; central banks' financial stability mandates and governance arrangements need to be compatible with their monetary policy responsibilities; and clarity about the roles and responsibilities of all authorities involved in financial stability policy is of paramount importance for effective and rapid decision-making, for managing trade-offs and for accountability.
Mr Ingves said today, "There needs to be clarity about the financial stability responsibilities of central banks. This is needed to reduce the risk of a mismatch between what the public expects and what the central bank can deliver, as well as to promote accountability. Even though it is difficult to define and operationalise financial stability concepts, it is important from the viewpoint of proper governance arrangements for the central bank to have an explicit mandate."
The report provides extensive coverage of new arrangements that are being put in place in a number of countries, and that are planned for others. Stanley Fischer, who chairs the Central Bank Governance Group, said that "strong and effective governance of the wider powers now being given to the authorities responsible for systemic stability is essential.
The report sets out the details of important new arrangements for macroprudential policy that are being developed in several countries, in the context of a wider discussion of relevant governance issues".
United States
After much debate – which included consideration of quite different proposals for the future institutional structure for financial stability policy – the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 was passed by Congress and signed into law in July 2010. The Act’s main objectives were four-fold: to promote financial stability by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, and to protect consumers from abusive financial services practices.
The institutional structure that was adopted by the Act has several features:
●● The distributed regulation and supervision model continues, whereby different regulatory agencies at the federal level specialise on different institutional forms and different markets, though the Office of Thrift Supervision was abolished and its reponsibilities transferred to other agencies. A new Financial Stability Oversight Council (FSOC) was created to identify systemic risks and gaps in supervision, and to recommend regulatory enhancements. It has a membership that includes the heads of the eight main federal regulatory agencies, with some smaller ones not represented. There are also numerous state-level regulators, which have some representation in FSOC, albeit in a non-voting capacity.
●● The FSOC was created primarily to take a system-wide view of developments that may affect financial stability, including making certain decisions on which entities will be subject to heightened regulatory and supervisory standards because of their systemic significance. It will also act as a peer review body, serve as a referee in relation to jurisdictional disputes, and be a focal point for analysis and advice to Congress on gaps and weaknesses in regulatory frameworks.
●● In several places, the Act addresses the issue of jurisdictional overlaps that result from the multiplicity of regulatory agencies that interface with multifaceted market players. In some cases, coordination mechanisms are specified. In other cases, backup arrangements are specified, whereby a secondary supervisory/ regulatory agency can prompt the lead agency into action, or take action themselves.
●● Decisions that involve the potential for substantial risk to the taxpayer, and some that may be particularly politically sensitive, require the assent of the Secretary of the Treasury. Such decisions include elements of both emergency actions and the definition of regulatory boundaries.
●● While the Federal Reserve has just one of 10 votes on the FSOC, and has had its authority somewhat constrained in the area of emergency lending, it nonetheless now has a more prominent formal role in financial stability
Annex: Recent reforms to financial stability policy governance arrangements Central bank governance and financial stability 79A matters. It has become the primary regulator for systemically important entities (expanding its supervisory role beyond large bank holding companies), or can strongly influence the supervision of such entities that are regulated by others. Recognising the importance of its financial stability responsibilities, the Act creates a new post of Vice-Chairman for Supervision at the Board (appointed by the President with the advice and consent of the Senate).
●● Federal level consumer protection responsibilities relating to the financial system have been assigned to a new Bureau of Consumer Protection, to behoused at the Federal Reserve but as an autonomous Executive agency (with a Director appointed by the President and confirmed by the Senate, with its own personnel policies, and with protections from Board interference in its activities. The institutional and governance features of the arrangements put in place by the Act are detailed further in the following sections, dealing respectively with normal and crisis times.
For normal times - ongoing supervision and regulation
This section focuses mainly on institutional features of the new regulatory structure for normal times that has been created by the Act, with a particular emphasis on systemic, macroprudential elements. While many of the details of macroprudential policy are yet to be determined – the Act calls for agencies to undertake considerable development work in a number of areas, with (by one count7) a need to create 243 rules and conduct 67 studies – the main feature of systemic oversight in the new arrangements is the identification of systemically important entities and the application of heightened regulatory standards to them. A new coordinating body, the FSOC, is the locus of many decisions on identification of systemically significant entities and recommendations on the specification of such heightened standards, with final decisions regarding those heightened standards largely resting with the Federal Reserve.
Financial Stability Oversight Council (FSOC)
The FSOC is composed of ten voting members – the Treasury Secretary (who is also Chairperson of the Council); the Chairman of the Board of Governors of the Federal Reserve System (the Board); the heads of the Consumer Financial Protection Bureau, OCC, SEC, FDIC, CFTC, FHFA, and NCUA; an independent member with insurance expertise appointed by the President and confirmed by the Senate – and 5 non-voting members – the heads of the newly established Office of Financial Research and the Federal Insurance Office, and a State insurance commissioner, banking supervisor, and securities commissioner.
The FSOC’s duties include determining which, if any, non-bank financial companies are systemically significant (requires a two thirds majority vote, including the affirmative vote of the Treasury Secretary) and will consequently be subject to enhanced, consolidated supervision by the Board.
The FSOC’s other duties include advising member agencies and Congress, monitoring markets, identifying systemic risks and gaps in supervision, recommending supervisory priorities and regulatory enhancements, facilitating collection and sharing of data for financial stability purposes, serving as a forum for agency discussion, and testifying annually before Congress.
http://www.bis.org/publ/othp14.pdf
