Slovenian government struggles to appoint new governor

By Dan Hardie | News | 14 December 2018

Lawmakers due to vote on nominee after governor retired citing threats and pressure over bail-in

Boštjan Jazbec

Slovenia’s government is attempting to find a central bank governor to replace Boštjan Jazbec, who quit after coming under severe political pressure over a bank bail-in.

Jazbec announced his resignation as Bank of Slovenia governor on March 20, saying he had come under “intolerable” pressure, including death threats, over the decision to “bail in” shareholders and bond-holders of several major banks in 2013 and 2014. He said he would take up a role with the European Resolution Board.

Slovene lawmakers rejected Jazbec’s deputy governor as his successor after he was nominated by the Slovene president Borut Pahor. The president then nominated Boštjan Vasle as governor on November 30.  Vasle served as head of the Slovenian government’s economic research institute, Umar, from 2007 until November 29.

Vasle must be confirmed by a simple majority in a secret ballot of the lower house of the country’s parliament. The vote must be held before December 30, according to a Reuters report.

Slovenia is a member of the European Community and uses the euro. Its central bank governor sits on the European Central Bank’s governing council.

First nominee rejected

President Pahor first nominated Primoz Dolenc, who has served as Bank of Slovenia deputy governor since 2016, to take over as governor, in September. But he was rejected by lawmakers the following month. Dolenc won only 30 votes of a necessary 46 from the 90 members of Slovenia’s national assembly. Another 39 lawmakers voted against him in a secret ballot.

Conservative lawmaker Jozef Horvat told the Slovene parliament that he did not believe the central bank had properly carried out its supervisory functions, according to a Reuters report.

Former governor attacked presidential adviser

The lawmakers’ rejection of the first nominee for governor is the latest sign of continuing tension between politicians and the central bank. 

Jazbec, in a statement on March 22, specifically criticised an adviser to president Pahor as having behaved improperly over the bank bail-in.

Jazbec said presidential adviser France Arhar had published an article saying he had told the president that every candidate for central bank governor must consider how to deal with the bank bail-in. Arhar also called the bailed-in shareholders and bond-holders “injured parties”, a description the then-governor strongly rejected.

Police raid

The most dramatic incident in connection with the bank bail-ins came in July 2016, when Slovenian police raided the central bank. The police said they were investigating possible irregularities in the central bank’s conduct in 2013. Jazbec was informed by prosecutors that he was under formal investigation for his role in the bail-in.  

ECB president Mario Draghi issued a formal protest to the Slovene government, saying the raid was “unlawful”, and demanding the return of computers containing information about the Eurosystem. Draghi also wrote a public letter to European Commission head Jean-Claude Juncker asking him to take further action if the Slovene authorities did not respond in a satisfactory manner. The Slovene authorities returned the computers to the central bank.

Slovenia’s then-finance minister, Dusan Mramor, resigned in protest over the raid, calling it an “attack” on the central bank.

ECB intervenes on central bank laws

The ECB has used official opinions to strongly criticise a series of attempts by the former Slovene government to change laws governing the central bank and its handling of the bail-ins. In May 2017, and then in October of the same year, the ECB warned against a proposed system of compensating bailed-in bondholders and shareholders.

The two draft laws would put the burden of proof on the central bank in legal cases where shareholders and bondholders were arguing they had been unfairly treated, the ECB said. The laws could also lead to the unjustifiable disclosure of classified information, it said. The laws have not been passed by Slovenia’s parliament.

Former governor Jazbec also criticised several of the draft laws, saying they would harm central bank independence.

Changes in government

The Slovene government from September 2014 to March 2018, during the period when the central bank became embroiled in the dispute over the bail-ins, was a centre-right coalition. It was led by prime minister Miro Cerar, head of the Centre Modern party.

Cerar continues to serve as deputy prime minister after a new ruling coalition was formed in September 2018. His party is the third-largest in the coalition.

The new government is led by prime minister is Marjan Šarec, who leads a party named after himself. Šarec became prime minister in August after his party became the country’s largest in elections held in June.

President Pahor is a member and former leader of the Social Democrats, currently the second-largest party in the country’s coalition government. He was Slovenia’s prime minister from 2008 to 2012, when he was elected to the largely ceremonial role of president. He won election to a second five-year term in 2017.

Brazil to provide more information on policy decisions from 2019

By Central Banking Newsdesk | News | 14 December 2018

Central bank holds key Selic rate at 6.5% on volatile financial markets and stable inflation

The Central Bank of Brazil

The Central Bank of Brazil will provide the public with more information about its monetary policy decisions from January 2019, it said on December 13.

The central bank will start publishing on its website the votes of the monetary policy council, including the reasons for the resolutions adopted by the council.

The institution thinks with this measure “there will be a reduction of asymmetry of information and greater convergence of signalling of public policies, generating positive impact on society”.

The central bank already made this information public on demand. But now it will always publish it, regardless of any request being submitted.

On December 12, the institution had left the key Selic rate unchanged at the record-low level of 6.5%. The two main reasons requiring this accommodative approach were a challenging financial environment and on-target inflation, it said.

The monetary policy council argued heightened financial volatility represents a challenge for emerging markets. “The main risks are associated with an increase in risk aversion in global financial markets, with normalisation of interest rates in some advanced economies, and with uncertainty regarding global trade,” says the policy statement.

Low interest rates are, therefore, required to underpin the economic recovery. Brazil suffered the worst crisis on record between 2014 and 2016. Falling commodity prices and political instability contributed to a depreciation of the real, which generated higher inflation.

The Central Bank of Brazil sharply tightened monetary policy to 14.25% in February 2015 from 10% in January 2014, while GDP contracted by 3.5% in 2015, and the same in 2016.

Year-on-year inflation declined to 3% in 2017 from 10.7% in 2015, after which policy-makers began to cut rates in order to stimulate growth.

This more benign economic environment persists, providing the central bank with room to keep rates low.

Rate-setters think that “various measures of underlying inflation are running at appropriate or comfortable levels. This includes the components that are most sensitive to the business cycle and monetary policy”.

Inflation expectations for 2018, 2019 and 2020 are around 3.7%, 4.1% and 4%, respectively. Year-on-year inflation was recorded at 4% in November, down from 4.6% in October. The Central Bank of Brazil’s target is 4.5% for 2018.

This was the last policy meeting presided over by governor Ilan Goldfajn. In November he announced his resignation, citing “personal reasons”. His successor is Roberto Campos Neto, senior executive with Banco Santander’s Brazilian subsidiary.

Yield curve inversions may become more frequent, researchers say

By Central Banking Newsdesk | Research | 14 December 2018

Richmond Fed study examines relationship between term premium and yield curve inversion

The Federal Reserve Bank of Richmond

If term premiums remain low, yield curve inversions are likely to become more frequent even if there is no increased risk of recession, a team of researchers from the Richmond Fed says.

In the report, Renee Haltom, Elaine Wissuchek and Alexander Wolman simulate data for the short-term interest rate and then measure how the frequency of yield curve inversions varies with the behaviour of the term premium.

They find that the occurrence of yield curve inversions in these simulations differs with the distribution of term premiums.

For instance, as the term premium falls during the simulated period, the proportion of time the yield curve is likely to be inverted increases. The results show that for an average term premium of 1.62%, the yield curve would be inverted for 10% of the time. A term premium of 0.16% would mean the yield curve would be inverted for 46% of the time.

The authors highlight that the study holds all other factors equal. In reality, factors such as quantitative easing would have an influence on these results, they say.

RBNZ proposes to ‘almost double’ capital requirements

By Central Banking Newsdesk | News | 14 December 2018

Central bank advocates shareholders bear greater risk to incentivise good management

The Reserve Bank of New Zealand

The Reserve Bank of New Zealand opened a consultation today (December 14) on a proposal to “almost double” the minimum capital requirements banks must comply with.

The central bank says it won’t apply the same increase to all banks. The actual implementation will depend on the existing levels of capital, how much extra capital individual banks choose to hold above the minimum, and their size. The RBNZ estimates the increase would range from 20% to 60%.

The increase would make a considerable dent in banks’ profits. It is expected to amount to 70% of the sector’s profits over the proposed five-year transition period. However, the RBNZ forecasts “only a minor impact on borrowing rates for customers”.

“While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders,” says deputy governor and general manager of financial stability, Geoff Bascand.

Since January 2013, the minimum capital ratios required by the RBNZ have included a Common Equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, and a total capital ratio of 8%. Since January 2014, banks failing to record a common equity buffer ratio of 2.5% above these minimum ratios have faced restrictions on the distributions they can offer. This is the so-called conservation buffer, part of the Basel III framework.

The RBNZ also thinks it would be appropriate to increase bank shareholders’ losses in case of failure. The supervisor argues this would incentivise better management.

“Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed,” says Bascand. “Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors.”

Bascand says the ultimate objective of these proposals is to make financial crises extremely rare events.

“Bank crises happen more often than many people care to remember, and the economic and social costs of bank failures can be very high and persistent,” says the deputy governor. “With these changes we estimate the banking system will be resilient to shocks that might occur only once every 200 years.”

The consultation will remain open until March 29 2019.

Fed presidents weigh in on December rate decision

By William Towning | News | 14 December 2018

Incoming data and recent speeches point to slightly more dovish outlook

A Federal Reserve rate hold may not be completely out of the question when policy-makers meet next week for the final scheduled decision of the year.

Since the last meeting, some Fed officials have made slightly more dovish remarks than they had previously. Many have also reaffirmed the increasing importance of data dependence in decision-making.

The Fed unanimously voted to maintain its target range for the federal funds rate at 2–2.25% in its last meeting, on November 7 and 8.

Overall, markets still expect a hike at the December 18–19 meeting. Chief global economist at BNP Paribas, Luigi Speranza, agrees with the consensus. “The global slowdown next year will start to have an impact on the Fed’s policy, however tight labour markets will weigh most on their decision next week,” he says.

Speranza adds the Fed will likely adopt softer language about the interest rate path, but will have to balance growth against the tight labour market. “If they do decide to pause early next year, I think they will engage again because of the labour conditions.”

Depending on data

Key data is showing signs that the US economy may have started to cool down in some areas, such as inflation and credit. Despite strong growth and tighter labour markets in 2018, the expectations for next year also appear to be tilting slightly towards the downside.

Data from the St Louis Fed’s Fred database suggests headline inflation slowed to just below 2% in October, down from 2.3% in July. In a recent paper, the San Francisco Fed also warns there is “considerable possibility” inflation will fall further below the FOMC 2% target in the near term.

Inflation reached the Fed’s target earlier this year after a long period of performing below par. The San Fran Fed paper says the recent recovery in prices has not been fuelled by a stronger economy but by “acyclical” factors, such as increases in prices in telephone contracts and financial services.

In the labour market, expectations of earnings growth over the next year dropped sharply for the second consecutive month, to 2% from 2.5% in October. This is the lowest level since February, according to the New York Fed’s survey of consumer expectations.

The proportion of survey respondents who felt the US unemployment rate will be higher one year from now also increased by 0.7% to 35.8%. This figure remains above the 12-month trailing average of 34%. US employers slowed their hiring in November, but average hourly earnings increased from $27.29 to $27.35. Unemployment remains at 3.7%, a multi-decade low.

Economic growth continued at a “moderate” or “modest” rate for most of the Fed’s 12 districts, according to the Fed’s Beige Book released on December 5. However, Dallas and Philadelphia noted slower growth, while St Louis and Kansas City recorded “slight” growth. 

“Most districts reported that firms remained positive; however, optimism has waned in some as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labour market constraints,” the report said.

In the credit market, the New York Fed’s credit access survey shows the application rate for credit has fallen over the past year, while there has also been an increase in the rejection rate for credit card extensions and mortgage refinancing requests. The proportion of respondents who have had their accounts shut down by lenders reached its highest level since the report was launched in 2013.

The household debt and credit report revealed the credit delinquencies have also been increasing over the last year.

FOMC voters’ stances

In March, Fed governor Lael Brainard made a speech entitled ‘navigating monetary policy as headwinds shift to tailwinds’. The essence of the speech was that the Fed must “be ready to adjust the path of policy” in reaction to the winds.

Brainard highlighted a number of indicators that backed the hawkish tone of her speech. She said higher oil prices were providing strong support for business investment, while high equity prices were having a positive impact on consumer and business spending. Most notably, she said, fiscal policy was providing the greatest tailwind to growth.

But since then, oil prices peaked and have been falling since October. The equity prices in major indexes around the world have also been losing value in recent months, and fiscal stimulus is expected to fade somewhat in 2019.

The factors Brainard highlighted as tailwinds earlier in the year may now be becoming headwinds to the economy. This may reflect why in a speech on December 7 her tone was slightly more dovish than previous remarks.

“The gradual path of increases in the federal funds rate has served us well by giving us time to assess the effects of policy as we have proceeded. That approach remains appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves,” Brainard said.

Fed chair Jerome Powell’s remarks on November 28 also signalled a slightly softer monetary policy path. “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy,” he said.

In an interview with CNBC on November 16, vice-chair Richard Clarida said: “We are at a point where we really need to be data-dependant. The economy is doing well. We are looking for signals from the labour market, from inflation, to get a sense of both the pace and the destination for policy. So this is very much in data-dependent mode right now.”

On December 6, Atlanta Fed president Raphael Bostic weighed in on the debate by saying he thinks the interest rate is now within “shouting distance” of the neutral rate. He suggested he favours at least some more policy tightening, but did not mention any timings on the moves.

San Fran Fed president Mary Daly appears to agree with Bostic. She said “it wouldn’t be a surprise” if the FOMC decided to hike in next week’s meeting, in an interview with Bloomberg on November 12.

Voters next year

The upcoming meeting is the final session before the committee rotates its voting members. The incoming votes are Chicago Fed president Charles Evans, St Louis’s James Bullard, Kansas City’s Esther George and Boston’s Eric Rosengren.

Evans’ recent remarks at a fixed income forum suggest he may bring a hawkish vote to the committee meetings next year. Reuters reports the Fed president said raising rates to a destination of about 3.25% “would be a reasonable assumption”, given his outlook for the US economy.

He added that the risk of a possible slowdown in the global economy next year currently does not appear to be enough to disrupt the strong US economic trajectory.

In contrast, Bullard argued for a pause in rate hikes in December, suggesting he may bring a dovish vote to the meetings next year. He said in a speech on December 7, with a pause “you would get a lot more information about what’s troubling the financial market”.

BoE revamps expenses rules after criticism from MPs

By Daniel Hinge | News | 14 December 2018

MP says some officials’ expenses claims are “staggeringly high”

Bank of England

The Bank of England has fast-tracked a review of its expenses rules, publishing a new code today (December 14) amid criticism from members of parliament.

The travel and expenses policy is reviewed “at least” every two years. The latest review was brought forward after criticism from members of the UK’s Treasury Committee.

Quarterly expenses disclosures by BoE officials have long courted controversy. The central bank’s two US-based committee members, Anil Kashyap and Don Kohn, tend to clock up particularly large bills as they have to fly to London for meetings.

Furthermore, governor Mark Carney’s international travel costs tend to run into the hundreds of thousands of pounds each year. Between December 2016 and December 2017, he recorded expenses of more than £155,000 ($195,000).

Carney told the Treasury Committee earlier this year that he received pay from his roles as chair of various international organisations, including the Financial Stability Board, which he put towards his travel expenses.

In contrast to some of their committee colleagues, UK-based members have far smaller expenses. For example, since March 2016, Martin Taylor has claimed just a few hundred pounds, and Richard Sharp has claimed nothing.

Bradley Fried, chair of the BoE’s Court, was grilled by politicians on some of the expenses figures in June. MPs asked Fried to explain a sum of £11,085 that Kashyap had claimed for a single trip, though it later transpired there had been a mistake in Kashyap’s declaration, and the figure was for four transatlantic flights.

Fried told parliamentarians he believed Kohn and Kashyap were making a “tremendous” contribution to UK financial stability, though he conceded it was hard to put a monetary value on such a thing.

Treasury Committee chair Nicky Morgan said in a statement today she still viewed several of the BoE’s expenses claims as “staggeringly high”.

“The review of [the BoE’s] expenses policy is welcome,” she said. “The Bank must now ensure that the new rules are followed in both letter and spirit by all staff across the organisation.”

Relative to the earlier expenses code, the new document contains clearer general provisions on travel, urging BoE staff to consider the environment but also their own wellbeing when booking travel. Overall, decisions should be guided by the principles of “value-for-money” and “integrity”.

A chart in the new document points out that business class air travel produces around 71 kilos of CO2 per 100 miles, relative to 24 kilos when flying economy class, or just two kilos for international rail travel. However, the document also stresses that long-distance travel comes at a personal cost, adding “the Bank wants staff to be able to perform at their best when travelling for work”.

Business class flights appear to have contributed the largest chunk of senior BoE officials’ expenses claims. The new document clarifies when taking such flights is seen as justified.

For flights under six hours, business class is only permissible to accommodate a disability, where justified for “information security reasons”, or where no cheaper ticket is available.

Information security covers instances where governors or policy committee members may be travelling while working on “sensitive matters”.

For 6–10 hour flights, business class is permissible for the above reasons, or if the flight is overnight, or if the individual will have to start work immediately after arriving at their destination. Above 10 hours, business class travel is permissible for all trips.

The BoE stresses that no first-class flights will be reimbursed, except on airlines where business class is described as ‘first class’.

In a statement today, Fried said the BoE had found its policy to be “broadly in line” with other UK public bodies. “In conducting this review, we focussed on three key priorities: that the policy was clear and consistent, such that it can be easily applied to all Bank staff; that it must benchmark well against the other UK public institutions; and that it must balance the need to ensure value-for-money against staff wellbeing and safety,” he said.

Morgan said the Treasury Committee would again examine the BoE’s expenses, and the new expenses code, when members of the Court testify in the new year.

Fragility of forex market stays SNB’s hand

By Central Banking Newsdesk | Official Record | 14 December 2018

Central bank maintains Libor rate target and negative policy rate

The “fragile” situation surrounding Switzerland’s exchange rate prompted the Swiss National Bank to maintain its monetary policy stance at its last decision for 2018.

The SNB held its target range for the three-month London Interbank Offered Rate (Libor) at –1.25 to –0.25%. The rate has remained at this level since January 2015.

“The situation on the foreign exchange market continues to be fragile,” the central bank said in its statement.

While the franc has depreciated only slightly against the US dollar on a trade-weighted basis, the central bank noted the local currency was still “highly valued”.

This development is “primarily due to the strengthening of the US dollar”, the central bank explained. The franc is virtually unchanged against the euro. Interest rates were also kept negative at –0.75%, while the central bank said it remained “ready” to intervene in the exchange markets if needed.

Five central banks and supervisors join environmental group

By Central Banking Newsdesk | Official Record | 14 December 2018

Network for Greening the Financial System aims to help meet Paris agreement goals

Five central banks and supervisors joined the Network for Greening the Financial System (NGFS) on the first anniversary of the body, December 12.

The European Banking Authority, Bank of Portugal, Norges Bank, the Reserve Bank of New Zealand and Sveriges Riksbank became the newest members of the NGFS. In barely a year, the group has grown to 24 members and five observers from five continents, up from eight original members.

The NGFS was created in the wake of the ‘One Planet Summit’ in Paris in December 2017. The group aims to promote policies to achieve the goals of the 2015 Paris agreement on climate change. The long-term goal of this accord is preventing global average temperatures from rising above 1.5°C from pre-industrial levels.

“It is a significant breakthrough that the very broad NGFS membership has signed up to the acknowledgement that climate-related risks are a source of financial risk and therefore fall squarely within their mandates,” says NGFS chairman Frank Elderson. “I look forward to consolidating the work over the next year and achieving tangible results”.

The body will publish its first comprehensive report on April 17, 2019 in Paris. The NGFS says it will put forward guidelines and policy options, and identify areas where progress is more needed.

Draghi warns of downside risks as ECB ends net asset purchases

By Central Banking Newsdesk | News | 13 December 2018

ECB will continue buying sovereign bonds with yields below deposit rate

Mario Draghi

European Central Bank president Mario Draghi warned that eurozone inflation risks were “moving to the downside” as he confirmed the ECB was ending its net asset purchasing.

Draghi had been widely expected to announce that the ECB was halting its purchase of public and private sector assets today (December 13). But his warning about mounting downside risks to eurozone growth and inflation was less expected.

The ECB president said risks were rising due to increased political instability, rising fears of protectionism, volatility on financial markets and dangers to emerging markets. Draghi has warned about these dangers in previous monetary policy press conferences and speeches. But this is the first time he has said they are pushing the balance of risks to the downside. The ECB kept its policy rates at their current levels.

Re-investment principles

The ECB also revealed for the first time how it intends to use to re-invest the principal on its matured assets. 

Draghi told the press conference that the ECB’s governing council had unanimously backed the adoption of these principles for reinvesting matured assets. The ECB president is due to end his term in October 2019. There has been speculation that some northern European central bank governors, led by Bundesbank president Jens Weidmann, have called for a quicker end to the ECB’s quantitative easing programme.

It said it would “aim to maintain the size of its cumulative net purchases under each constituent programme” of its asset purchase programme when re-investing matured assets.

Four smaller programmes make up the APP: the public sector purchase programme (PSPP); the asset-backed securities purchase programme; the third covered bond purchase programme; and the corporate sector purchase programme. “Limited temporary deviations in the overall size and composition of the APP may occur during the reinvestment for operational reasons”, the ECB added.

The purchases of eurozone countries’ sovereign bonds “will continue to be guided” by the proportion of the amount of the ECB’s “capital key” that different countries have been allocated, the ECB said.  

“As a rule, therefore, redemptions will be reinvested in the jurisdiction in which principal repayments are made, but the portfolio allocation across jurisdictions will continue to be adjusted with a view to bringing the share of the PSPP portfolio into closer alignment with the respective national central banks’ subscription to the ECB capital key.”

The ECB will continue to buy sovereign debt even if the yields are lower than its deposit facility, it announced. Eurosystem central banks would “continue to adhere to the principle of market neutrality via smooth and flexible implementation”, it said. “To this end, the reinvestment of principal redemptions will be distributed over the year to allow for a regular and balanced market presence.”

In June, the ECB said its monthly net asset purchases would only continue until the end of December 2018, as long as data confirmed its governing council’s medium-term inflation outlook.

In the second half of 2018, year-on-year eurozone inflation has been recorded above the ECB’s target of below, but close to, 2% over the medium term. In October, year-on-year eurozone inflation reached 2.2%. But the European Union’s official statistical agency Eurostat expects it to fall to 2% in November.

The ECB has been gradually phasing in the end of its asset purchases. In March 2017, the ECB reduced monthly purchases to €60 billion ($68.2 billion) from €80 billion. In January 2018, monthly purchases declined to €30 billion, and last September to €15 billion.

The ECB launched the programme in March 2015. Between December 2014 and April 2015, year-on-year inflation in the Eurozone was 0% or below. In March 2015 it reached –0.1%.

In less than four years, by November 2018, the APP accumulated assets worth more than €2.5 trillion. This includes sovereign and corporate bonds, as well as asset-backed securities and covered bonds.

The ECB’s PSPP accounted for the largest share of these assets, buying almost €2.1 trillion in sovereign bonds.  A recent ruling by the European Court of Justice rejected a claim by groups of German citizens that the programme unlawfully breached the ECB’s mandate.

Book notes: Macroprudential policy and practice, edited by Paul Mizen, Margarita Rubio and Philip Turner

By William Allen | Review | 13 December 2018

Important overview of current state of thinking about macro-prudential policy, but uncertainties remain about current allocation of financial stability responsibilities

Paul Mizen, Margarita Rubio and Philip Turner (eds), Macroprudential policy and practice, Cambridge University Press, 2018, 315 pages

One legacy of the financial crisis is the new-found belief that macro-prudential policies, as well as monetary policies and the supervision of financial institutions, are necessary if central banks are to achieve both price stability and financial stability. 

Many of the papers on macro-prudential policies in this book estimate the effects of various kinds of policies, such as maximum loan-to-value ratios for residential mortgages, or increased minimum capital ratios for banks. The estimates are, of course, based on dynamic stochastic general equilibrium models of various kinds, and it is impossible not to feel some scepticism about them, as Stefano Neri ruefully points out in his contribution. Moreover, as Hal Scott has demonstrated, the contagion that gripped money markets in 2008 was by no means wholly based on objective information about the interconnectedness of financial institutions: largely, it was pure panic.1 How do you model that?

It is therefore reassuring that some of the papers address basic issues related to macro-prudential policies. Jagjit Chadha outlines how the advent of macro-prudential policies has affected central banking. Jean-Pierre Landau stresses the importance of central banks ensuring an adequate – but not excessive – supply of liquidity. Bearing in mind the damage a sudden loss of liquidity can do in a leveraged economy, it is hard to disagree with him. Philip Turner points out macro-prudential policies have macroeconomic effects, and one wonders why macro-prudential and monetary policies are decided by separate committees in the Bank of England.

Most fundamentally and most importantly, Richard Barwell analyses the dangers of pursuing an imprecisely defined objective without any models that can reliably predict the effects of any policy action.2 It might reasonably be said that monetary policy used to be managed in that way, before the days of inflation targets, but in those days, the objective was determined by the democratically controlled Treasury, even if in an inconsistent way. The BoE was merely the Treasury’s adviser and implementer. There are several inter-related unresolved issues, including:

Turner rightly points out that, for many years in the late 19th and early 20th centuries, the BoE’s objective was what would now be called financial stability, but it was not envisaged in that epoch that discretionary action by the central bank could prevent crises. The central bank was instead expected merely to avoid causing crises, and to limit the damage after crises had occurred.

Strikingly, the post-crisis analysis of financial stability has not included any proposals for serious reform of the internal governance of banks. There is an obvious risk that the directors of a limited liability company will not, in fact, concern themselves with the company’s long-term interests, as they are legally obliged to do in the UK, but will force the company to gamble for high returns, comforted by the limitation of shareholders’ liability. There has been some discussion of the possibility of modifying limited liability in some way, but surprisingly little.

The book provides a valuable overview of the current state of thinking about macro-prudential policy, and some important and sobering reflections on its likely utility. It does not, however, provide any reassurance the issues have been settled, nor that the current allocation of responsibilities for financial stability will endure.


1. Scott, Hal S, Connectedness and contagion (Cambridge, Massachusetts, MIT Press, 2016).

2. The issues involved in understanding macro-prudential policy objectives and instruments are surveyed by G Galati and R Moessner in ‘Macro-prudential policy – a literature review’ in Journal of Economic Surveys, Volume 27, Number 5, 2013, pages 846–878.

3. Galati G and R Moessner, ‘Macro-prudential policy – a literature review’ in Journal of Economic Surveys, Volume 27, Number 5, 2013, page 285.

4. Samy, Antoninus, The building society promise: access, risk, and efficiency 1880–1939, Oxford Historical Monographs (Oxford: Oxford University Press, 2016), chapter 3.

5. Samy, Antoninus, The building society promise: access, risk, and efficiency 1880–1939, Oxford Historical Monographs (Oxford: Oxford University Press, 2016), page 294.