What future for What future for CentralCentral Banks?Banks?

Howard DaviesHoward Davies

DirectorDirector

The London School of EconomicsThe London School of Economics

Hong Kong Hong Kong TheatreTheatre – LSE – LSE London - 24 November, 2005

2. No ‘dull Governor’… 2. No ‘dull Governor’…

3. …No ‘dull Governor’? 3. …No ‘dull Governor’?

4. Functions of Central Banks4. Functions of Central Banks

CountryCountry Monetary PolicyMonetary Policy Bank Bank SupervisionSupervision Note IssueNote IssueUS US UK UK FranFrancece

CanadCanadaa[ EC[ ECBB

GermaGermany ny ItalyItalyJapaJapann

Small Small Part Part

ParPart t

Small Small Part Part

]]

5. Central Bankers/100,000 5. Central Bankers/100,000 inhabitantsinhabitants

0 10 20 30 40 50 60 70

Russia

Euro-area

USA

Sweden

S. Africa

Australia

Japan

UK

Central Bankers/ 100,000 inhabitants

Source: The Economist, 2005

6. Central Bank ‘Efficiency’6. Central Bank ‘Efficiency’

0

50

100

150

200

250

Inefficiency (%)

Source: Central Banking Publications, 2005

7. Central Bankers’ Salaries 7. Central Bankers’ Salaries ($’000)($’000)

0

100

200

300

400

500

600

700

800

$'000

A. Fazio?

J-C TrichetMervyn King

A. Greenspan

A. Weber

I. Macfarlane

Source: FT, 28/10/2005 (CentralBankNet.com for Fazio’s unconfirmed 2003 salary)

8. Four Trends8. Four Trends

1. Inflation targets1. Inflation targets

9. Four Trends9. Four Trends

1. Inflation targets1. Inflation targets

2. Changes in Financial 2. Changes in Financial SupervisionSupervision

10. Countries with Integrated 10. Countries with Integrated Regulators Regulators 1986

1990

1991

1998

2000

2001

2002 2004

KredittilsynetKredittilsynet ( (Norway - March Norway - March 1986)1986)Finanstilsynet (Finanstilsynet (Denmark - January 1990)Denmark - January 1990)

Finansinspektionen (Finansinspektionen (SwedenSweden - July 1991) - July 1991)Financial Supervisory Commission (Korea - April 1998)Financial Supervisory Commission (Korea - April 1998)

Financial Services Agency (Japan - July 2000)Financial Services Agency (Japan - July 2000)Fjármálaeftirlitið (FME) (Iceland - June 1998)Fjármálaeftirlitið (FME) (Iceland - June 1998)

FSA (UK - December FSA (UK - December 2001)2001)**

BaFin (Germany - May BaFin (Germany - May 2002)2002)

Finanzmarktaufsicht (Austria - Finanzmarktaufsicht (Austria - April 2002)April 2002)

Finantsinspektioon (Finantsinspektioon (EstoniaEstonia - May 2001) - May 2001)

CBFA (Belgium - August CBFA (Belgium - August 2002)2002)Agency of Financial Supervision (Kazakhstan - April 2004)Agency of Financial Supervision (Kazakhstan - April 2004)

* FSA fully * FSA fully integrated in integrated in 2001, but has 2001, but has existed since existed since October 1997October 1997

11. How the Centres Rank in 11. How the Centres Rank in Terms of their Regulatory Terms of their Regulatory EnvironmentEnvironment

02468

101214161820

London New York Paris Frankfurt

Average Score

Source: Z/Yen, 2005

12. Four Trends12. Four Trends

1. Inflation targets1. Inflation targets

2. Changes in Financial 2. Changes in Financial SupervisionSupervision

3. Financial Stability3. Financial Stability

13. Bank of England ‘Financial 13. Bank of England ‘Financial Stability Review’Stability Review’

“The Financial Stability Review aims:

• to encourage informed debate on financial stability issues, domestically and internationally

• to survey potential risks to financial stability

• to analyse ways of promoting and maintaining a stable financial system”Source: Bank of England, 2005

14. Four Trends14. Four Trends

1. Inflation targets1. Inflation targets

2. Changes in Financial 2. Changes in Financial SupervisionSupervision3. Financial Stability3. Financial Stability

4. Public Expectations 4. Public Expectations

15. Guiding Principles for 15. Guiding Principles for Central Banks Central Banks

1. 1. Price stability provides substantial benefits2. 2. Fiscal policy should be aligned with monetary policy3. 3. Time inconsistency is a serious problem to be avoided4. 4. Monetary policy should be forward looking5. 5. Accountability is a basic principle of democracy6. 6. Monetary policy should be concerned about output as well as price fluctuations

7. 7. The most serious economic downturns are associated with financial instability

Source: Mishkin, 2000

16. Mishkin’s 7 Criteria For the 16. Mishkin’s 7 Criteria For the Role of a Central BankRole of a Central Bank

1.1. Price Stability should be the overriding, long runPrice Stability should be the overriding, long rungoal of monetary policygoal of monetary policy

2. An explicit nominal anchor should be adopted2. An explicit nominal anchor should be adopted

17. Mishkin’s 7 Criteria (2)17. Mishkin’s 7 Criteria (2)

1. Price Stability should be the overriding, long run goal 1. Price Stability should be the overriding, long run goal of monetary policyof monetary policy2. An explicit nominal anchor should be adopted2. An explicit nominal anchor should be adopted

3. A Central Bank should be goal dependent3. A Central Bank should be goal dependent

4. A Central Bank should be instrument independent4. A Central Bank should be instrument independent

18. Mishkin’s 7 Criteria (3)18. Mishkin’s 7 Criteria (3)

1. Price Stability should be the overriding, long run1. Price Stability should be the overriding, long rungoal of monetary policygoal of monetary policy2. An explicit nominal anchor should be adopted2. An explicit nominal anchor should be adopted3. A Central Bank should be goal dependent3. A Central Bank should be goal dependent4. A Central Bank should be instrument independent4. A Central Bank should be instrument independent

5. A Central Bank should be accountable5. A Central Bank should be accountable

19. Mishkin’s 7 Criteria (4)19. Mishkin’s 7 Criteria (4)

1. Price Stability should be the overriding, long run goal1. Price Stability should be the overriding, long run goalof monetary policyof monetary policy2. An explicit nominal anchor should be adopted2. An explicit nominal anchor should be adopted3. A Central Bank should be goal dependent3. A Central Bank should be goal dependent4. A Central Bank should be instrument independent4. A Central Bank should be instrument independent5. A Central Bank should be accountable5. A Central Bank should be accountable

6. A Central Bank should stress transparency and 6. A Central Bank should stress transparency and communicationcommunication

20. Mishkin’s 7 Criteria (5)20. Mishkin’s 7 Criteria (5)

1. Price Stability should be the overriding, long run1. Price Stability should be the overriding, long rungoal of monetary policygoal of monetary policy2. An explicit nominal anchor should be adopted2. An explicit nominal anchor should be adopted3. A Central Bank should be goal dependent3. A Central Bank should be goal dependent4. A Central Bank should be instrument independent4. A Central Bank should be instrument independent5. A Central Bank should be accountable5. A Central Bank should be accountable6. A Central Bank should stress transparency and 6. A Central Bank should stress transparency and

communicationcommunication

7. A Central Bank should also have the goal of 7. A Central Bank should also have the goal of financial stability.financial stability.

21. …No ‘dull Governor’ either21. …No ‘dull Governor’ either

22. Mishkin’s 7 Criteria plus 22. Mishkin’s 7 Criteria plus OneOne

8. A Central Bank should not seek8. A Central Bank should not seekresponsibilities which require different formsresponsibilities which require different formsof accountability and political dependenceof accountability and political dependence