Since the financial crisis we have seen an evolving and deepening role for central banks around the world. No longer are central banks responsible for only monetary policy and inflation but they are now tasked with safeguarding the financial system and maintaining financial stability.
Pawel Smaga conducted a comprehensive survey of the 27 European Union central banks and ranked European central banks using a “Financial Stability Engagement index” to measure involvement in fostering financial stability.
The index measures the extent to which a central bank analyzes and promotes financial stability. The most important factors determining its value are a central bank’s actions, decisions taken by the parliament (e.g. formal division of tasks within the safety net), and actions of other safety net institutions in cooperation with the given central bank. The author identifies 10 criteria, which can describe differences in the behavior of central banks toward fulfilling its role of contributing to financial stability.
The ten criteria are in bold and the complementary survey question is beneath it:
1) Does the central bank have a legal financial stability mandate?
Survey: Is the scope of the current mandate sufficient or should it be widened?
2) Does the central bank have a financial stability definition?
Survey: How does the way the definition is constructed determine the scope of financial stability analysis?
3) Does the central bank publish financial stability indicators?
Survey: Are FSIs based on the methodology by IMF or ECB? Are they useful when analyzing financial stability? In what way can they be expanded?
4) Does the central bank publish its own financial stability index?
Survey: Does the central bank have its own financial stability index? Please explain why yes or no and give its brief description. Is it regularly published or for internal purposes only? Does it have a satisfactory forecasting power?
5) Does the central bank carry out and publish its own stress tests results of the banking/financial sector?
Survey: Is stress testing the most effective tool in financial stability analysis?
6) Does the central bank publish reports on financial stability?
Survey: What are the reasons behind (aims of) publishing FSRs? Are they being achieved?
7) Does the central bank act as payment systems overseer?
Survey: In what way does overseeing payment system developments enhance the financial stability analysis?
8) Does the central bank act as a microprudential supervisor of the banking/financial system?
Survey: What are the benefits for financial stability policy of the current engagement in microprudential supervision and whether the central bank would like to see its mandate widened in this respect?
9) Does the central bank act as a macroprudential supervisor?
Survey: Does the macroprudential oversight have to be within central bank objectives? What would be the benefits? How to formulate the macroprudential mandate?
10) Does the central bank have a separate department responsible for analyzing financial stability?
Survey: What is the best organizational solution for financial stability issues?
To read the full study and see the results of the rankings click here.