Deputy Governor of Bank of Finland
Workshop on the Finances of Central Banks
Organised by the Bank for International Settlements in Basel on 12 November 2013
Panel discussion: How real is a threat to policy capacity arising from financial outcomes? What are realistic options for threat management?
Key talking points (check against delivery)
Threats to operational and policy effectiveness?
When considering potential threats to the policy effectiveness of the central banks, the key concept is credibility. Credibility of the central bank is almost synonymous with its ability to make its actions effective in the market. This is equally important for the effectiveness of policy commitments as for the effectiveness of actual monetary policy operations.
- The financial position of the central bank: Sound finances are important for the de facto independence of the central bank. The reason for this is clear. An independent central bank should be able to fund its operations independently and not become dependent on the government discretion for its financial resources.
- The institutional position of the central bank as a public institution, its prerogatives and its legal independence. Independence protects the bank from political influences and makes it possible for the bank to pursue its mandate in a consistent way. Only consistent policy can be fully effective.
- The quality of the bank’s operations and communications. To be able to influence the market, the central bank’s policy intentions must be transparent and the practical implementation of the policy must be perceived as professional. Otherwise the market reactions to policy may not be as desired.
- Flexible rules on provisioning. We are able to book above-the-line provisions from unrealized capital gains which can then be used to cover future capital losses. Moreover, the law allows us to book above-the-line provisions also for maintaining the real value of equity capital.
- Sensible rules on profit distribution. The basic scheme according to law is that half of the accounting profit of the Bank be transferred to the reserve fund and the other half paid to the state. However, the law also says that exception can be made from this rule if the financial condition of the Bank warrants such exception. It is the Supervisory Council of the Bank, composed of parliamentarians, which makes the ultimate decision. After the Finnish Banking crisis of the early 1990s, it took until 2000 before any profits were transferred to the state.
- The governance structure. The Bank of Finland is institutionally not subordinate to the government, but instead to the parliament. The supervisory Council which wields the ultimate financial powers over the bank is a parliamentary body separate from the government ministries. It has proven to give a high priority to the financial soundness of the Bank of Finland, and has not reflected the occasional pressures arising from the Ministry of Finance for example.
- Institutional support by the ECB. The ECB’s opinions give powerful support to the financial independence of the National Central Banks of the eurosystem. For instance, when there was political discussion in Finland in 2003 about extracting capital from the central bank, the institutional support from the ECB was important in avoiding that action.