Alin Andries (Alexandru Ioan Cuza University of Iasi): Systemic risk and central bank independence in Asia

Alin Andries (Alexandru Ioan Cuza University of Iasi): Systemic risk and central bank independence in Asia

Co-author: Anca Podpiera (World Bank)

Abstract

The recent financial crisis has raised a number of important questions concerning the role of the central bank in the prevention, management and resolution of financial crises. It has been argued that central bank independence may not only be beneficial for reaching the objective of price stability, but also for maintaining financial stability. Greater independence from external pressure implies that central banks are less politically constrained in acting to prevent financial distress, while it also will allow them to act earlier and more decisively when a crisis erupts. However, there is no evidence on whether countries with a higher level of central bank independence were more successful than others during the crisis. Using a sample of commercial banks operating in various Asian countries over the period 2001–2015, this paper investigates whether and how systemic risk is influenced by the central bank independence. We find a significant and robust negative relation between central bank independence and systemic risk, which is mostly due to operational independence. Additionally, our results highlight the importance of other country, banking system and governance indicators in identifying the asymmetric effect of central bank independence on the systemic risk.

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