Highlights of "Issues in the Governance of Central Banks"

Central banks vary substantially in structure and purpose, but they all have important responsibilities for monetary policy, the stability of the financial system and core elements of the financial infrastructure. Complex issues are encountered in designing effective governance arrangements for each of these major functions. However, in broader terms, effective governance of any institution, including a central bank, requires:

  • clear and well-specified objectives;
  • appropriate powers and resources; and
  • close alignment of objectives and incentives.

In what ways are today’s central banks accommodating these requirements?

1. Objectives

Price stability is now the primary objective of most central banks, either because of an explicit legislative mandate or because more general objectives have been interpreted to require it. Yet all central banks take other economic considerations into account to some degree.

Clear objectives for the financial stability function are more challenging to devise; central bank legislation tends to be less specific about those objectives, even though elements of the task (eg lender of last resort and oversight of the payment system) have long been central bank functions. A number of countries are now re-examining the appropriate role of the central bank in the area of financial stability.

2. Powers and resources

Legislation usually seeks to structure the appointment process and tenure for central bank governors in a manner that supports the autonomy of the central bank. That is often done by requiring the involvement of more than one branch of government in the appointment process – which also advances the goal of choosing qualified candidates – and by providing longish, staggered terms of office so as to protect appointees from inappropriate influence, whether political or private.

Collegial decision-making is a hallmark of modern central banking that both augments the independence of the decision-making process and enhances the quality of decisions. In the vast majority of the world’s central banks, boards or committees are responsible for making policy decisions; in most cases, boards also oversee the operation of the bank. Collegial decision-making is better able to stand up to unwarranted external pressure. Committees also permit a wider range of perspectives to be brought to bear, which adds to the legitimacy and credibility of central bank decisions.

Regarding financial resources, central banks normally generate sufficient revenue to cover their operating costs and to set aside contingency reserves. Those revenues, together with rigorous budgeting procedures that make central banks accountable for their use of resources, provide them with financial autonomy. Revenue surpluses are transferred to the state in accordance with clearly specified rules.

3. Objectives and incentives

Transparency about objectives, procedures and the stewardship of resources plays a prominent role in the alignment of objectives and incentives. Announcing a clear objective exposes those responsible for achieving it to reputational risk. Compared with their predecessor institutions, modern central banks release much more information about their decisions and the reasons for them, and about their financial position and use of resources. Such information is employed in a wide range of accountability mechanisms involving reports to the legislature, oversight by supervisory boards, assessments by independent commissions, and legal recourse through ex post judicial review.