Willem Buiter warns in FT post about the risks of the ECB being at the core of the ESRB. He argues that central banks have neither the technical knowledge, nor the legitimacy, to dominate the macro-prudential financial stability framework.
Willem Buiter presents the following six arguments supporting the view that central banks are greatly over-represented on the proposed ESRB.
· The ECB, the Eurosystem NCBs and the rest of the EU NCBs have not exactly covered themselves with glory in the area of macro-prudential supervision and regulation during the past decade. Like the Fed, they failed to foresee the financial crisis, let alone prevent it.
· The central banks in control of the ESRB would be conflicted in the use of their instruments, especially in the setting of short-term interest rates under their control, by the potentially clashing demands of both price and financial stability. This point has been made many times, but does not get any less convincing because of its frequent invocation.
· Macro-prudential regulation and supervision inevitably involve guiding and directing the actions, and even determining the fate, of large systemically important individual financial institutions. Such institutional life-or-death decisions involve property rights and other important distributional and wider political dimensions, as well as technical issues. They are inherently political, even party-political. The independence of the ECB in the area of price stability could be undermined if it were to play a dominant role in macro-prudential regulation and supervision.
· The proposed construction ignores the central fiscal dimension of financial stability. Although there was much that was flawed about the UK model of financial stability management, its tripartite nature has to be a feature of any viable system for macro-prudential management. The key financial stability- related competencies are (1) liquidity provision; (2) prescribing and proscribing behaviour of financial actors and (3); solvency support.
· The proposed construction does not allow for the proper representation of the financial industry. Obviously, we do not want turkeys to turn up in large numbers to vote against Christmas. Industry representatives should, however, be present as a matter of course in a non-voting capacity. The expertise of central banks, regulators/supervisors and ministries of finance concerning complex systems and convoluted financial instruments are all quite inadequate as a foundation for effective macro-prudential management. We must get the banks, hedge funds and other financial institutions inside the tent.
· The proposed construction does not permit external, independent talent, knowledge and expertise to be brought to bear on the decision-making process. There are independent experts outside the central banks, regulators/supervisors and ministries of finance and in the (private) financial sector who would have much to contribute to a systemic risk board. Time to get such experts, be they at universities, think tanks or other research institutes on board.
© Financial Times
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