Financial policy governance after the crisis—putting new wine into old bottles

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Outside new courthouse ECA


Walter Bagehot ([1873], 2000) famously commented in his book Lombard Street on the need to adapt a central bank’s governance structure to its changing purpose, writing that “‘putting new wine into old bottles’ is safe only when you watch the condition of the bottle, and adapt its structure most carefully.” This metaphor is particularly useful in understanding new and emerging challenges involved in tailoring the structure of financial policy governance in the post-crisis era.

The global financial crisis (GFC) exposed the lack of adequate coordination and information sharing among policies overseeing different parts of the financial system in many countries. Even where the microprudential supervisor was part of the central bank, information to the other areas the central bank is responsible for (e.g. financial stability and lender of last resort) did not always flow smoothly and promptly. The addition of the new policy areas—macroprudential policy (MaP) and bank resolution (BR)—brought a host of new governance issues such as where these new functions should be placed, which instruments should be used and what type of relationships they may have with microprudential banking supervision (MBS), on the one hand; and with monetary policy, on the other.  These interrelations among different functions could be even more complex and challenging in crisis times when critical decisions encompassing all the financial stability functions must be made quickly.

In a new working paper we zoom into governance arrangements that ensure effective coordination and collaboration among MaP, MBS, and BR building on the findings from an extensive survey on governance practices in 13 European and Central Asian (ECA) countries and 8 (high-income) benchmarking countries. The responses from the survey are used to identify concrete policy recommendations for ECA, but they could apply to many other emerging and developing countries.

Where does ECA stand on financial policy governance?

In a nutshell, our results indicate that there is a room for improvement in financial policy governance in ECA and that crisis management frameworks are in their infancy. There are several flaws in the institutional arrangements for (newly established) MaP and BR functions. Moreover, whether enough coordination and collaboration among different functions can be achieved through the Coordinating Financial Stability Committees (CFSCs) remains unclear and in most cases untested. Data and information/analysis sharing often do not have a legal base and usually depends on personal contacts. Conflict resolution mechanisms among different policy functions are yet to be defined.

Sound governance for each policy requires clarity of mandate, ownership of implementation/enforcement, and accountability and integrity

In ECA, there is a need to adopt a clear legal framework and develop enhanced practices that ensure sound governance for each policy. The MaP mandate  needs to be better articulated in the law, and a dedicated department for this function needs to be established. Accountability in the region should be strengthened for all three policy functions, but especially for MaP and BR. Independence of the relevant authority should also be reinforced by fixed term and staggered appointments for decision-makers. ECA countries further need to emphasize operational and reporting separation among different functions, particularly if they are housed in one authority.

Collaboration and coordination among policies requires information sharing, interaction in the decision-making process, and efficient resolution of disagreements

ECA countries should establish more detailed arrangements for data sharing among departments/authorities at the technical level. Interactions among senior policy-makers in the decision-making process should be strengthened through inter-agency committees or cross-representation in decision-making bodies. Governance of CFSCs could be enhanced by having a high-level, regular, pre-set meeting schedule for coordination and data-sharing. Within the CFSCs, ECA countries should consider separating crisis management and BR with crisis prevention functions (micro- and macroprudential policies) where politics are better kept at a distance. Narrow focus of the CFSCs in coordination and therefore narrow membership could bring more effective outcomes in most cases.

An effective crisis management framework requires institutional arrangements that ensure clarity of responsibilities in crisis and ultimate coherence of policy action

ECA countries should adopt formal mechanisms for information sharing, decision making, reporting and accountability requirements in crisis and anchor responsibility for overseeing crisis preparedness and crisis management in the law. There is a particularly strong need in the region to strengthen recovery and resolution plans, and practice crisis scenarios using crisis simulation exercises.

Final Words

No specific institutional model can avoid conflicts of interest and inter/intra-agency conflicts and turf wars are likely to arise. Yet, consideration needs to be given to the complex interactions among MaP, MBS and BR, to ensure that, during both normal and crisis times, the objectives and tools used to promote one policy do not compromise the others.

As elsewhere, the need for a governance framework that ensures effective collaboration and coordination among three policy functions, in addition to well-functioning of each policy, is increasingly being recognized among ECA countries. However, there remains an ample room for further progress.

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