Blog Post

The Winner’s Curse

Bruegel Director Jean Pisani-Ferry raises questions about the mandate, accountability and independence of central banks in the aftermath of the financial crisis. He highlights the proposed creation of the European Systemic Risk Board (ESRB), which will probably be a de facto subsidiary of the European Central Bank, and explains that the ESRB will likely face […]

By: Date: October 14, 2009 Topic: Banking and capital markets

Bruegel Director Jean Pisani-Ferry raises questions about the mandate, accountability and independence of central banks in the aftermath of the financial crisis. He highlights the proposed creation of the European Systemic Risk Board (ESRB), which will probably be a de facto subsidiary of the European Central Bank, and explains that the ESRB will likely face problems when it must make decisions in which governments previously had sole authority.

Central banks emerged from the crisis as winners. They provided liquidity when in demand. They were inventive when needed. They exhibited boldness in front of storms. They proved capable of fast decisions. Especially the ECB defied all predictions and showed up to the task of managing a crisis (the Fed also, but it is in a somewhat less glorious situation as it is accused of having been both the arsonist and the fireman).
It is only natural, therefore, that central banks are in the process of being given additional responsibilities for financial stability. The question, however, is at what cost to the clarity of their mandate, their accountability and, possibly even, their independence.
The question starts with monetary policy. Over the last three decades (essentially since 1979, the year when Paul Volcker broke with the eclectic discretion that characterised the Fed’s policy and when France and other countries anchored their currencies on the Deutsche Mark), monetary policy philosophy has constantly evolved in the direction of specialisation, predictability and transparency – three mutually consistent features of modern central banking, which in turn facilitated the political accountability of the monetary institution. The end point of this evolution was the single-objective, inflation-targeting monetary institution of the early 2000s, the one Mervyn King once ironically yet proudly described as ‘boring’.
But the increased weight of the financial stability objective alongside the price stability objective is suddenly making things complex again. True, unlike the ECB some central banks had it as an objective since inception, not least the Fed. But even in the latter case it did not have a major bearing on policy, as indicated by the Greenspan doctrine that central banks should not prick bubbles. The future will be different. Instead of the one-instrument, one-objective framework they were converging on, central banks will have to pursue two objectives with one instrument, which is bound to bring back the very concept – trade-offs – they had succeeded of getting rid of. Having to choose between two objectives also makes accountability more difficult, because you need to explain why precedence has been given to one of the goals at the expense of the other one. There will be no shortage of Jesuitical arguments to explain that financial stability is nothing else than price stability envisaged over a little longer horizon, but facts are likely to prove stubborn things.
Not entirely by coincidence, a new instrument is in the making under the name of macroprudential supervision. Following the De Larosière report, the EU has decided to create a new European Systemic Risk Board (ESRB) with the task of contributing to financial stability. According to the proposal put forward by the Commission at end-September it will be chaired by a central banker (in all likelihood the president of the ECB) and the majority of its members with voting rights will be central bankers. Its secretariat will be provided by the ECB. So the ESRB won’t legally be a central bank but it will be a central bank’s subsidiary and its public face will be undistinguishable from that of the ECB.
The ESRB will be deprived of decision-making powers and policy instruments, but it will issue warnings and recommendations to supervisors and governments in the EU, and monitor their implementation. So for example if it assesses that housing credit developments are unhealthy, it will recommend a tightening of credit standards or of mortgage regulations.
There is a debate about whether this approach will prove effective. But let us assume it will. This will be because the ESRB will have led governments or supervisors to take decisions in fields where they have competence, such as supervision, regulation, or even perhaps taxation. This will go beyond the mere opinion central banks give on all sort of policy issues, from fiscal policy to structural reform, because here the ESRB will, in the name of its very mandate, request other policy bodies to ‘comply or explain’. In the process the strict separation between the domain of the central bank and that of government bodies is likely to be challenged – and perhaps with it the intellectual and institutional edifice that has been painfully built over the last three decades.
To start with, there will be disagreements over the assessment of the situation and the risks involved. In the mid-2000s, there were such disagreements between the EU and Spain about the risks involved in Spanish housing developments. The reason why the Spanish authorities were inclined to a rather lenient view of the situation was that virtually anyone in Spain who had some money was buying and selling real estate. The EU actually had the power to issue a recommendation – but failed to do it. The ESRB will be confronted with similar problems.
Second, there will also be questions about who is to blame for failure if there is one, in other words the risk of blurred accountability. If this happens it will be uncomfortable for anyone, but first and foremost for the central bank as it will de facto have to share responsibility with government for policy mistakes.
Finally, the ECB has this far been extremely cautious to avoid being involved in policy decisions affecting one particular country or a subset of countries, as opposed to the euro area as a whole. But the ESRB will have explicit powers to addressing recommendations to a particular country – if only because threats to financial stability can be country-specific. So another Chinese wall is likely to fall in the process.
To give additional competencies and increasingly shared responsibilities to the central bank may be the best thing to do in order to preserve financial stability. This is no reason to ignore that such a move will bring it to the very terrain monetary authorities had gradually exited from over the last decades. So far, there has been surprisingly little discussion about the political and institutional implications of such an about-face.

This op-ed was published in Eurointelligence on 16th October 2009.

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article

Blog Post

Now is not the time to confiscate Russia’s central bank reserves

The idea of confiscating the Bank of Russia’s frozen reserves is attractive to some, but at this stage in the Ukraine conflict confiscation would be counterproductive and likely illegal.

By: Nicolas Véron and Joshua Kirschenbaum Topic: Banking and capital markets, Global economy and trade Date: May 16, 2022
Read about event More on this topic

Upcoming Event


How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy
Read about event

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic

Upcoming Event

May - Jun


Final conference of the MICROPROD project

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Filippo di Mauro, Wolfhard Kaus, Steffen Müller, Gianluca Santoni, Verena Plümpe, Andrea Roventini, Valerie Smeets, Nicola Viegi, Markus Zimmermann and Javier Miranda Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article More by this author

Blog Post

Owning up to sustainability risks: the EU should champion international standards

To keep European Union capital markets open and integrated, new international standards should be reflected in future European law and accounting practice to provide further incentives for a reallocation of capital, reflecting in particular climate risks.

By: Alexander Lehmann Topic: Banking and capital markets, Green economy Date: April 26, 2022
Read article Download PDF More on this topic

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More by this author



War in Ukraine: sanctions on Russia two months in

A further look into sanctions on Russia and the implications for the global financial system.

By: The Sound of Economics Topic: Banking and capital markets, European governance Date: April 22, 2022
Read article

Blog Post

The European Union should sanction Sberbank and other Russian banks

Sanctions on Sberbank and most other Russian banks should be imposed by the EU, without delay and at no major cost to either itself or like-minded countries, while it ponders an oil and gas ban.

By: Joshua Kirschenbaum and Nicolas Véron Topic: Banking and capital markets, Global economy and trade Date: April 15, 2022
Read article More on this topic

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Load more posts