Central bank independence in the EU:
from theory to practice
Lorenzo Bini Smaghi*
Member of the Executive Board of the European Central Bank
Abstract
This article provides an overview of the practical problems which arise in ensuring the
effective independence of central banks in the European Union, drawing on the European
Central Bank’s consultative experience. Four aspects of central bank independence are
discussed separately: functional, institutional, personal and financial. The possible issues
raised by central bank involvement in prudential supervision are touched upon. The main
conclusion of the article is that a set of legal provisions is generally not sufficient to ensure
proper central bank independence; a culture of respect for independence, including its
limits, among all parties involved is essential.
Keywords: Central bank independence, functional independence, personal independence,
monetary policy, prudential supervision.
JEL codes: E58
* The opinions expressed are those of the author. I thank A. Tupits and L. Stracca for their
input in the preparation of this article, which is an expanded and improved version of remarks
made at the conference Good Governance and Effective Partnership, Budapest, 19 April 2007.
1. Introduction
The issue of central bank independence has been the subject of important academic work.
However, the literature has mainly focused on the theoretical and formal aspects of
independence, without considering that the distance between theory and practice is not
always short.1 The experience of the past few years has shown that the implementation of
the rule of law is not without challenges, even inside the European Union (EU). While it is
in no way an objective of this paper to offer a critical survey of the existing academic
literature on the subject, I endeavour to shed some light on the more practical matters
involved in safeguarding central bank independence. The main sources for the material
referred to in this article are the convergence reports and the legal opinions of the European
Central Bank (ECB), the latter provided to national legislators in line with the ECB’s
consultative competence.2 A selection of the ECB’s main legal opinions in the field of
central bank independence is provided in the annex to this article.
The central argument of this article is that legal provisions are necessary, but not sufficient,
to ensure central bank independence. The incentives to circumvent the legal framework,
with a view to influencing the behaviour of the central bank, are always present. The
temptation stems from the fact that money creation has positive effects in the short term, on
growth and employment, while the costs, in terms of higher inflation, are paid over the
medium to longer term.3
Central bank independence is a way to protect policy-makers from the temptation of using
monetary policy in a distortionary way.
The Treaty establishing the European Community tries to deal with this temptation by
defining obligations also for the political authorities. In particular, Article 108 states that:
“Community institutions and bodies and the governments of the
Member States undertake to respect this principle [of central bank
independence] and not to seek to influence the members of the
1
Some academics have even proposed quantitative indicators to measure central bank independence; see, for example,
Grilli, Masciandaro and Tabellini (1991) and Cukierman, Webb and Neyapti (1992).
2
The ECB must be consulted by the Community institutions and the Member States on draft legislative provisions in
its fields of competence, pursuant to Article 105(4) of the Treaty establishing the European Community and Article 4
of the Statute of the ESCB. Council Decision 98/415/EC of 29 June 1998 on the consultation of the ECB by national
authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42) expressly requires that the Member States
take the measures necessary to ensure compliance with this obligation.
3
See Bini Smaghi (2006).
2
decision-making bodies of the ECB or of the national central banks in
the performance of their tasks”.
The extent and nature of central bank independence can be assessed on the basis of an
analysis of the legal provisions. However, central bank independence also hinges on a
broad series of factors and customary practices, which are partly determined by historical
developments. In particular, the way in which certain conflicts between the central bank
and other government bodies have been resolved influences the extent to which a central
bank is effectively protected against external interference and marks the boundaries of
independence.4
In the eight years of Economic and Monetary Union, the ECB has issued several opinions
on the way the principle of central bank independence was being implemented in the
Member States. These opinions highlight how the interpretation of the law is often an
important and controversial issue.
This article will consider four categories of central bank independence: functional,
institutional, personal and financial. Each aspect of central bank independence is treated in
a separate section: functional independence in Section 2, institutional independence in
Section 3, personal independence in Section 4, and financial independence in Section 5.
Section 6 discusses the possible problems raised by central bank involvement in prudential
supervision. Section 7 concludes.
2. Functional independence
An independent central bank should be free to set its policy instrument with the aim of
achieving its objective. Functional independence thus requires that the primary objective of
a national central bank (NCB) be set in a clear and legally certain way. For EU countrries,
the objective should be fully in line with that of price stability established by the Treaty.
Such clarity was not always respected and at times the objective of the central bank was
described with generic provisions, referring for instance to the implementation of monetary
policy by controlling the amount of money in circulation. This was the case for Latvia, for
instance. The ECB requested Latvia to change the definition of the objective of monetary
4
See Bini Smaghi and Gros (2000).
3
policy in order to make it compliant with the Treaty or the Statute of the European System
of Central Banks and of the European Central Bank.5
From an operational viewpoint, the primary objective of price stability implies that the
central bank should have full autonomous power in setting the level of the short-term
interest rate in the money market. In market economies6 with modern financial systems,
monetary policy normally operates through changes in the level of the interest rate. Any
obstacle to the ability of central banks to affect market interest rates should be considered
as an obstacle to their independence. An example of such an obstacle would be the
obligation for a central bank to directly finance budget deficits, which would clearly reduce
its ability to influence money market conditions in the direction it deems most appropriate
for the pursuit of price stability. Other large industrial countries have adopted similar
legislation over the years.7 This is the reason why the Treaty prohibits, in Article 101, the
monetary financing of budget deficits. This is, of course, also a legal precondition for
joining the EU and the euro area and the ECB is empowered under Article 237(d) of the
Treaty to ensure compliance by all EU central banks with this prohibition.
The compliance of national legislation with the prohibition of monetary financing is
regularly evaluated in the ECB Convergence Reports and in ECB opinions on national
legislation. For example, national laws may contain provisions that enable national central
banks to provide loans to banks, without explicitly confining such transactions to loans that
are granted in connection with central banking tasks such as monetary policy, payment
systems or temporary liquidity support operations. Such provisions fail to establish
sufficient safeguards to prevent such lending from potentially breaching the monetary
financing prohibition contained in Article 101 of the Treaty, as they do not contain
provisions confining the provision of loans to illiquid but solvent banks or prohibiting the
provision of loans to insolvent banks or any other provisions having equivalent effect. This
was the case in several countries, notably in Cyprus, Hungary and Poland.8
5
6
See the ECB’s Convergence Report 2004, p. 223, and the ECB’s Convergence Report December 2006, p. 219.
Where (most) prices are not set directly by the government.
7
The Federal Reserve System of the United States is prohibited from directly underwriting government debt in the
Federal Reserve Act (FRA). This prohibition was not part of the original FRA of 1913, but was added after the First
World War. In Japan, the Public Finance Law prohibits the Bank of Japan in principle from underwriting government
bonds and making loans to the government. However, this does not apply to “special cases” within an amount
determined by the Diet.
8
For more details see ECB’s December 2006 Convergence Report, pages 28-30 explaining the scope of the monetary
financing prohibition, in particular page 216-217 on Cyprus, page 222-223 on Hungary and pages 228-229 on
Poland.
4
Another incompatibility with the Treaty prohibition arose insofar as some national laws
contain provisions according to which the national central banks concerned are required or
entitled to finance public sector bodies or to provide credit facilities to such bodies, despite
the fact that such bodies are independent from the central bank, have their own legal
personality and carry out tasks that are entrusted upon them by the public sector of the
Member State concerned. For example, in the Czech Republic a legislative provision has
been identified which required the national central bank to provide administrative support
(including the payment of the salary) to the independent Financial Arbiter, although such
an arbiter was elected by the Parliament, was required to perform his duties independently,
was answerable only to the Parliament and his salary was set by the Parliament. 9 Similarly,
legislative provisions have been identified in Hungary, Poland and Slovakia giving
unconditional powers to the national central bank concerned to grant credit to national
deposit guarantee funds, although such deposit guarantee funds constituted autonomous
public law and were not managed by the NCBs concerned.10 Such national law provisions
are incompatible with the monetary financing prohibition as they amount to a financing of
the public sector or public sector obligations to third parties.
More generally, governments can undermine the independence of monetary policy by
conducting an unsustainable fiscal policy. When fiscal policy becomes dominant over
monetary policy, the functional independence of the central bank is de facto undermined.
This is why the EU has adopted explicit provisions, in the EU Treaty and in the Stability
and Growth Pact, aimed at avoiding overburdening the single monetary policy. 11 Also in
this case experience has shown that the mere adoption of norms is insufficient to ensure
that they are respected in practice.
3. Institutional independence
9
For more details see ECB’s December 2006 Convergence Report, page 211 on Czech Republic.
10
For more details see ECB’s December 2006 Convergence Report, page 223 on Hungary, page 228-229 on Poland and
pages 230 on Slovakia.
11
The monetary financing prohibition is laid down in Article 101(1) of the Treaty, which prohibits overdraft facilities or
any other type of credit facility with the ECB or the national central banks (NCBs) of Member States in favour of
Community institutions or bodies, central governments, regional, local or other public authorities, other bodies
governed by public law, or public undertakings of Member States; and the purchase directly from these public sector
entities by the ECB or NCBs of debt instruments. The Treaty contains one exemption from the prohibition: it does not
apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, must be
given the same treatment as private credit institutions (Article 101(2) of the Treaty). Under Article 104 of the Treaty,
the duty of Member States to avoid excessive government deficits is monitored by the Commission.
5
Institutional independence can be defined as the overall independence of the institution
within the constellation of the various organs of government. In the EU institutional
framework, this principle is expressly referred to in Article 108 of the Treaty and Article 7
of the Statute. These two articles prohibit the NCBs and members of their decision-making
bodies from seeking or taking instructions from Community institutions or bodies, from
any government of a Member State or from any other body. In addition, they prohibit
Community institutions and bodies and the governments of the Member States from
seeking to influence those members of the NCBs’ decision-making bodies whose decisions
may affect the fulfilment of the NCBs’ ESCB-related tasks.
Institutional independence has to be guaranteed at the point when a country joins the EU,
rather than at the point when it joins the euro area. In practice, however, a close
examination of central bank institutional independence is carried out during the latter
process in the context of the ECB’s (and the European Commission’s) convergence reports.
The ECB’s Convergence Report 2004 found that, in the Czech Republic, Estonia, Latvia,
Lithuania, Hungary, Malta, Poland, Slovenia and Sweden, incompatibilities existed, to a
lesser or greater degree, between national legislation and the Treaty and the Statute in this
key area of central bank independence.12 By May 2006, Lithuania and Slovenia had
eliminated such incompatibilities,13 followed by Estonia December 200614 and Cyprus and
Malta in May 2007.15
The principle of independence in Community and national legislation is still not fully
implemented. For instance, according to Hungarian law, the Minister of Justice still has a
right to provide his opinion to the central bank Governor on draft legal acts concerning the
Magyar Nemzeti Bank. Any requirement for the Magyar Nemzeti Bank to obtain the
opinion of the Hungarian Ministry of Justice ex ante on the basic tasks of the Bank is
incompatible with the principle of central bank independence as laid down in Article 108 of
the Treaty.16 In Poland, draft monetary policy guidelines may be subject to forwarding to
the Council of Ministers and the Minister of Finance, which is obviously not fully in line
with the Treaty.17
12
See the ECB’s Convergence Report 2004, p. 32.
13
See the ECB’s Convergence Report May 2006, pp. 75-77.
14
See the ECB’s Convergence Report December 2006, p. 38 (Estonia).
15
See the ECB’s Convergence Report May 2007, p. 29 (Cyprus) and 31 (Malta).
16
See the ECB’s Convergence Report 2004, p. 227, and the ECB’s Convergence Report December 2006, p. 222.
17
See the ECB’s Convergence Report 2004, p. 230, and the ECB’s Convergence Report December 2006, p. 228.
6
4. Personal independence
Turning to personal independence, the nomination and dismissal of the Governor and of
the members of the central bank’s decision-making bodies are the responsibility of the
political authorities. This does not mean, however, that there should be no criteria. There
are four issues to consider in this regard: the term of office; professional qualifications;
political affiliations; and collegiality.
With regard to the term of office, Article 14.2 of the Statute states that the central bank
laws must provide for a minimum term of office of five years for the Governor and protects
against the arbitrary dismissal of Governors. Governors may be relieved of their duties only
if they no longer fulfil the conditions required for the performance of their duties or if they
have been guilty of serious misconduct. The possibility of recourse to the European Court
of Justice is foreseen in the event of any abuse of this provision.
One possibility to circumvent this provision might arise in the context of the adoption of
new legislation aimed at reorganising the term of office of the Governor. The change in law
could be used as an opportunity to dismiss the Governor. In order to protect the personal
independence, any reorganisation of the term of office should foresee that the existing
Governor continues to perform his or her duties until the end of the term of office for which
he or she has been appointed. This was made clear, for example, in an ECB opinion on an
Italian draft law changing the Governor’s term of office to eight years. While the term of
office was compatible with the Treaty and the Statute, the ECB pointed out that the draft
law amounted to an ex lege revocation of the appointment of the incumbent Governor.18
Subsequently, the law was adapted in line with the ECB opinion.
Another way to circumvent the requirement of personal independence is to adopt different
rules for the other members of the decision-making bodies of the NCBs involved in the
performance of ESCB-related tasks. In collegiate decision-making bodies in particular, if
the other members do not have the same degree of independence as the Governor, the
independence of the central bank is at risk. The ECB has made this point clear in a number
of legal opinions over the past few years.19 For example, it advised the French20 and
18
19
See paragraph 8 of ECB opinion CON/2004/16 of 11 May 2004 at the request of the Italian Ministry of Economic
Affairs and Finance on a draft law on the protection of savings.
See paragraph 8 of ECB opinion CON/2004/35 of 4 November 2004 at the request of the Hungarian Ministry of
Finance on a draft law amending the Law on Magyar Nemzeti Bank; paragraph 8 of ECB opinion CON/2005/26 of 4
August 2005 at the request of Národná banka Slovenska on a draft law amending Act No 566/1992 Coll. on Národná
banka Slovenska, as amended, and on amendments to certain laws; paragraph 3.3 of ECB opinion CON/2006/44 of 25
August 2006 at the request of the Banca d’Italia on the amended Statute of the Banca d’Italia; paragraph 2.6 of ECB
opinion CON/2006/32 of 22 June 2006 at the request of the French Senate on a draft law on the Banque de France;
7
Cypriot21 legislators to amend provisions in national law that made it possible to appoint
board members for a term of less than five years. As another example, a draft Slovak law
foresaw alternative grounds for dismissal for the board members other than the Governor
that were incompatible with Article 14.2 of the Statute. Such a formulation was standing in
the way of legal clarity and, more importantly, could be used to circumvent the effective
protection of personal independence. The ECB therefore recommended referring only to
Article 14.2 of the Statute when stating the reasons for dismissal of a board member.22 This
opinion has not yet been incorporated into central bank law.
The next issue relates to the professional qualifications of the persons nominated to be
members of the decision-making bodies. This is not only a substantive requirement but also a
formal one. Indeed, it is not sufficient that the person has the necessary professional
qualifications, he/she must also be perceived to have them by the public. This ensures that
personal issues cannot be used to put pressure on the decision-making bodies to influence
their behaviour.
An important requirement for personal independence is the absence of any actual or potential
conflict of interest between a person’s duties related to the central bank’s decision-making
bodies (and also related to the ECB in the case of NCB Governors) and any other functions
which he/she may perform. Hence, as a matter of principle, membership of a decisionmaking body involved in the performance of ESCB-related tasks is incompatible with the
exercise of other functions that might create a conflict of interest.
Furthermore, to effectively ensure central bank independence, the appointed members of the
decision-making bodies should be clearly perceived to possess high professional capabilities
and be super partes. The Statute states that:
“the President, the Vice-President and the other members of the [ECB]
Executive Board shall be appointed from among persons of recognized
standing and professional experience in monetary or banking matters”.
and paragraphs 2.3 and 2.4 of ECB opinion CON/2007/6 of 7 March 2007 at the request of the German Ministry of
Finance on a draft Eighth Law amending the Law on the Deutsche Bundesbank .
20
See paragraph 2.6 of ECB opinion CON/2006/32 of 22 June 2006 at the request of the French Senate on a draft law
on the Banque de France.
21
ECB Convergence Report December 2006, p. 216. The amending law was adopted on 15 March 2007.
22
See paragraph 8 of ECB opinion CON/2005/26 of 4 August 2005 at the request of Národná banka Slovenska on a
draft law amending Act No 566/1992 Coll. on Národná banka Slovenska, as amended, and on amendments to certain
laws.
8
Problems may arise if the members of decision-making bodies have a political affiliation or
have played an active political role prior to their appointment, or (even more problematic) if
they are expected to play such a role afterwards. There are several examples of political
affiliation of central bank Governors or Board members being used by other institutions or
political parties as an excuse to put pressure on the central bank, especially after a change in
government. The ability of the central bank to speak out, if needed, possibly in critical terms,
with respect to economic and budgetary policies might also be impaired if the Governor, or
other members of the board, are perceived to have a political affiliation, as this might be
interpreted as political interference rather than fair judgement. In this respect, the ECB has
emphasised in its recent convergence reports that the assessment of legal convergence should
not be limited to a formal evaluation of the letter of national legislation but may also consider
whether the implementation of the relevant provisions complies with the spirit of the Treaty
and the Statute. The ECB has been particularly concerned about the pressure recently put on
the decision-making bodies of some NCBs, for instance in Poland last year, which are
inconsistent with the spirit of the Treaty.
A final issue is related to collegiality. A collegial decision-making body, composed of several
members, is more likely to resist external pressures and partisan behaviour. The ECB has
made this clear in a number of legal opinions, for example on the reform of the statute of the
Banca d’Italia.23 The latter was amended accordingly.
5. Financial independence
A central bank cannot credibly operate in an independent way without proper financial
means; it would be under a “sword of Damocles” if it depended on the government for the
financing of its operating expenses. Ensuring proper financial independence for central
banks is an essential part of the effective pursuit of price stability and of an overall credible
monetary regime. As emphasised by Buiter (2007), without Treasury support, there can be
no guarantee that the minimal amount of seigniorage required to ensure the solvency of the
central bank and finance its operating expenses would support a given inflation target.24
23
See ECB opinion CON/2006/44 of 25 August 2006 at the request of the Banca d’Italia on the amended Statute of the
Banca d’Italia.
24
In other words, a central bank may be forced to abandon a certain inflation target if this does not provide enough
seigniorage to cover its operating expenses, in order to prevent it from having negative equity. It should be noted,
however, that there are successful examples of stabilization policies being carried out by central banks with negative
capital, as in the case of Chile and the Czech Republic. In that case, however, it is crucial that the government
conducts a very controlled fiscal policy.
9
The concept of financial independence should therefore be assessed from the perspective of
whether any third party is able to exercise either direct or indirect influence not only over the
tasks of a central bank but also over its ability (understood both operationally, in terms of
manpower, and financially, in terms of appropriate financial resources) to fulfil its mandate.
Four aspects of financial independence – the right of a central bank to determine its own
budget, the application of central bank-specific accounting rules, clear provisions on the
distribution of profits (including if required the ability to retain profits in order to constitute
adequate reserves against risk exposures), and clearly defined financial liability for
supervisory authorities – are particularly relevant in this respect, and some of them have only
been refined quite recently in ECB legal opinions.25 These are the areas of financial
independence where NCBs are most vulnerable to outside influence.
In the euro area and the EU, Member States should not put their NCBs in a position where
they have insufficient financial resources to carry out their ESCB – or Eurosystem – related
tasks. Moreover, the principle of financial independence implies that an NCB must have
sufficient means to perform not only ESCB-related tasks but also its own national tasks
(e.g. financing its administration and own operations).
This has not always been uncontroversial. For example, the Finnish legislator proposed in
2003 to reduce the capital of Suomen Pankki – Finland’s central bank. The legislative
proposal would have forced the central bank to sell part of its foreign reserve assets. The
ECB indicated that reducing the equity of one NCB and imposing restrictions on the
management of its financial resources could not be considered in isolation from the
potential effect of such a reduction on the financial position, and therefore on the financial
independence, of the Eurosystem as a whole. The ECB noted that the obligation of Member
States to ensure the independence of their central banks puts them in an exceptional
position, since it obliges the Member States to keep the assessment of the level of financial
resources and the management of the capital of the NCB at arm’s length. The NCB should
25
The main formative ECB opinions in this area are the following:
 CON/2002/16 of 5 June 2002 at the request of the Irish Department of Finance on a draft Central Bank and
Financial Services Authority of Ireland Bill, 2002;
 CON/2003/22 of 15 October 2003 at the request of the Finnish Ministry of Finance on a draft government
proposal to amend the Suomen Pankki Act and other related acts;
 CON/2003/27 of 2 December 2003 at the request of the Austrian Federal Ministry of Finance on a draft Federal
law on the National Foundation for Research, Technology and Development;
 CON/2004/1 of 20 January 2004 at the request of the Economic Committee of the Finnish Parliament on the
government proposal to amend the Suomen Pankki Act and other related acts;
 CON/2006/38 of 25 July 2006 at the request of the Bank of Greece on a draft provision on the Bank of Greece’s
powers in the field of consumer protection;
 CON/2006/47 of 13 September 2006 at the request of the Czech Ministry of Industry and Trade on an amendment
to the Law on Česká národní banka.
10
not be dependent for its finances on the government, the parliament or any other third
party.26
Another example of a similar kind can be taken from the discussion on the Central Bank
and Financial Services Authority of Ireland Bill. The legislative proposal aimed to establish
the regulatory authority as a constituent part of the central bank, with its management
separated from that of the central bank. This structure could have posed risks for the
financial integrity of the NCB, since it could potentially have been exposed to liabilities
resulting from funding and budgetary decisions for the regulatory authority. The ECB
therefore recommended giving the organs of the central bank controlling powers with
regard to funding, budgetary and staffing decisions27.
Central bank-specific accounting rules were developed by the ECB in accordance with
Article 26 of its Statute for application to harmonised Eurosystem reporting, but have also
been voluntarily or statutorily applied to national financial statements by all Eurosystem
central banks. These rules differ from, for example, International Financial Reporting
Standards, in that valuation gains (“unrealised gains”) are not recognised as income but are
retained in the balance sheet, whereas valuation losses not covered by accumulated
revaluation accounts are expensed. This asymmetric income recognition treatment places
special emphasis on the prudence principle; it not only takes into account the large
exposures of the Eurosystem central banks, particularly in foreign exchange, but also
ensures that unrealised gains should in principle not be distributed as profit to finance
ministries. Furthermore, this accounting regime, which the IMF considers to be an
appropriate alternative to IFRS for central banks and which has already been adopted also
by central banks outside the Eurosystem, is linked to the issue of profit distribution.
The rules on the distribution of central bank profits need to be codified, though not
necessarily harmonised. Within the ESCB, rules vary from the extreme of requiring the
central bank to transfer (almost) all net profits to the State, to a more flexible position
where the central bank may freely determine the extent to which it retains annual profits in
order to build up provisions and reserves against financial risks. The latter also benefit the
State indirectly as they mitigate the effect of financial shocks on annual profit transfers.
26
See paragraph 8 of ECB opinion CON/2003/22 of 15 October 2003 at the request of the Finnish Ministry of Finance
on the government proposal to amend the Suomen Pankki Act and other related acts.
27
See paragraph 6 of ECB opinion CON/2002/16 of 5 June 2002 at the request of the Irish Department of Finance on a
draft Central Bank and Financial Services Authority of Ireland Bill, 2002.
11
The ECB has, for example, found the present arrangements on profit distribution in Sweden
to be incompatible with the requirement of central bank independence28. The General
Council of Sveriges Riksbank submits proposals to the Swedish Parliament and the
Swedish National Audit Office on the allocation of Sveriges Riksbank’s profits. The
provisions under which the Swedish Parliament determines the allocation of profits are
non-statutory and not legally binding.
6. Central bank independence and prudential supervision
The traditional borders between the banking, securities and insurance sectors of the
financial market have become increasingly blurred, as demonstrated by the emergence of
hybrid financial products, the increased use of risk transfer instruments and distribution
agreements between the three sectors, and the growing role of financial conglomerates. In
this context, the ECB has welcomed institutional frameworks established in Member States
that recognise the essential role of central banks in promoting the safety and soundness of
financial institutions and the stability of the financial system as a whole.29
In a number of legal opinions, the ECB has emphasised that maintaining the close
involvement of NCBs in prudential supervision is an important condition for allowing the
Eurosystem to contribute adequately to monitoring the risks to financial stability in the euro
area and to safeguard a smooth coordination between the central banking functions
exercised at the supranational level and the supervisory functions carried out at the national
level.30
The requirement of independence for prudential supervision has, however, been
traditionally somewhat more controversial than in the case of monetary policy. On the one
hand, this reflects the fact that prudential supervision is an area in which political interest is
typically strong, for various reasons, not least that providing credit to an insolvent bank
28
29
30
See the ECB’s Convergence Report December 2006, p. 232. See also the ECB’s Convergence Report 2004, p. 236,
and the ECB’s Convergence Report 2002, pp. 43-45.
See, for example, paragraph 5 of ECB opinion CON/2004/16 of 11 May 2004 at the request of the Italian Ministry of
Economic Affairs and Finance on a draft law on the protection of savings.
See paragraph 4 of ECB opinion CON/2001/10 of 25 May 2001 at the request of the Austrian Ministry of Finance on
a draft Federal law establishing and organising the financial market supervisory authority; paragraph 5 of ECB
opinion CON/2001/35 of 8 November 2001 at the request of the German Ministry of Finance on a draft law
establishing an integrated financial services supervision. See also Chapter 2 of ECB opinion CON/2006/15 of 9
March 2006 at the request of the Polish Minister of Finance on a draft law on the supervision of financial institutions,
as well as paragraph 2.8 of ECB opinion CON/2006/53 of 16 November 2006 at the request of the Polish Minister for
Finance on a draft law amending the Law on trading in financial instruments.
12
might ultimately be financed out of taxpayers’ money). On the other hand, there is no clear
provision for supervisory independence in Community legislation. Over recent years,
however, a doctrine of supervisory independence has developed as a “best practice” and is
now one of the Basel Core Principles of good supervision.
In this regard, a distinction should be made between two cases: (i) where prudential
supervision is a department of the central bank; and (ii) where supervision is a separate
entity, although possibly connected in some way with the central bank.
Some Member States place their financial supervisory authorities within their NCB. If the
law provides for separate decision-making for such supervisory authorities, it is important
to ensure that decisions adopted by the latter do not endanger the finances of the central
bank as a whole. In such cases, national legislation should ideally enable the NCB to have
ultimate control over any decision taken by the supervisory authorities that could affect the
independence of the central bank, in particular its financial independence.31 For example,
under the Central Bank and Financial Services Authority of Ireland Bill mentioned above,
the regulatory authority has a duty to act in a way that is consistent with the performance
by the Governor and the Board of their respective functions in relation to the Bank; for the
purpose of verifying compliance with that duty, the regulatory authority must provide the
Governor or the Board with any information that may be required.
Similar concerns were highlighted in an ECB opinion on the reform of supervisory
authorities in Poland, where the lack of a legal framework for the exchange of information
between the NCB and the supervisory authority was raised.
More generally, prudential supervision, by its very nature, lends itself to being a focus of
political interest. When the central bank is involved in supervision, therefore, there is an
increased risk of pressure on its financial independence and on the personal independence
of the members of its decision-making bodies, as witnessed in some EU countries in recent
years. Therefore, in such cases, central bank independence should be monitored
particularly attentively.
7. Conclusions
Safeguarding central bank independence takes more than a series of legal provisions, as the
experience of the past eight years has shown. It requires, above all, a high degree of
31
See CON/2002/16 of 5 June 2002 at the request of the Irish Department of Finance on a draft Central Bank and
Financial Services Authority of Ireland Bill, 2002.
13
acceptance of the principle of independence within the underlying political and economic
culture of the society. This requires a leading role to be taken by governments and
politicians, especially those in the euro area but also those in the other EU countries, in
understanding and explaining the fundamental reasons behind the decision to delegate
powers to an independent monetary authority for the welfare of present and future
generations. Central bank independence needs to be continuously protected and maintained
over time. This is the responsibility of the political institutions.
14
References
Bini Smaghi, L. and D. Gros (2000): Open Issues in European Central Banking,
MacMillan, London.
Bini Smaghi (2006): Democratic Representation and Economic Policy Rules,
Eunomiamaster, 28 September.
Buiter, W. H. (2002): “The fiscal theory of the price level: a critique”, Economic
Journal, vol. 112, pp. 459-480.
Buiter, W. H. (2007): “Seignorage”, NBER Working Paper No 12919.
Cukierman, S.B. Webb and B. Neyapti, Measuring the independence of central banks
and its effect on policy outcome, World Bank Economic Review 6 (1992), pp. 353–
398.
European Central Bank, Convergence Report, various years, available at www.ecb.int.
Grilli, V., D. Masciandaro and G. Tabellini (1991): “Political and Monetary Institutions
and Public Financial Policies in the Industrial Countries”, Economic Policy, 13, 341-92.
15
16
ANNEX: SELECTION OF ECB OPINIONS RELATED TO THE CENTRAL BANK
INDEPENDENCE
ECB opinion
Subject
1.
Austria: ECB opinion CON/2001/10 of 25 May
2001
Article of the Federal law establishing and
organising the financial market supervisory
authority and amending several related laws
2.
Germany: ECB opinion CON/2001/35 of 8
November 2001
Law establishing
services supervision
integrated
financial
Main recommendations and follow-up by the consulting authority
The main proposals expressed in the opinion and the follow-up were:
1. Responsibility of the Oesterreichische Nationalbank (OENB) for the overall stability
of the financial system as a whole: this role has not been attributed to the OeNB, but
there is a joint responsibility between the FMA (global finance supervisory authority),
the OeNB and the Ministry of Finance.
2. General duty of cooperation between the FMA and the OeNB in all fields of common
interest: cooperation required within the scope of the OeNB’s statutory duties and its
duties within the scope of the Eurosystem. A Memorandum of Understanding has not
been concluded as proposed by the ECB, but the FMA and the OeNB signed a common
position paper regarding banking supervision.
3. Information flow between the FMA and the OeNB and information to the
Eurosystem: the changes proposed to the draft law regarding the ongoing flow of
information and coverage of all sectors of the financial system have not been made as
such, but the FMA Act provides for a general mutual assistance obligation between the
two institutions, and the Banking Act provides for a specific obligation in relation to
banking supervision (see 2. above). In practice, regular meetings between the
management of both institutions take place, though limited to banking supervision.
There is no general provision regarding the provision of information to the Eurosystem
central banks concerning Eurosystem-related tasks as proposed by the ECB, but the
relevant acts provide for such provision of information, in particular Article 77(8) of the
Banking Act.
The ECB’s suggestions were as follows:
1. To integrate and modernise the underlying substantive law relating to financial
regulations and supervision. With regard to the underlying substantive law, it can be
seen that most, if not all, laws have been amended since 2001. Some of the laws have
been replaced by new laws.
2. The draft law should clarify that the Deutsche Bundesbank has responsibility for
contributing to the overall stability of the financial system. The definition of this role
should be included in the Banking Act. Section 3 of the Bundesbank Act (Gesetz über
die Deutsche Bundesbank) states: “It shall participate in the performance of the ESCB’s
tasks with the primary objective of maintaining price stability, shall hold and manage
3.
Ireland: ECB opinion CON/2002/16 of 5 June 2002
Draft Central Bank and Financial Services
Authority of Ireland Bill
4.
Finland: ECB opinion CON/2003/22 of 15 October
2003
Amendments to the Suomen Pankki Act and
related acts
5.
Austria: ECB
December 2003
The National Foundation for Research,
Technology and Development
opinion
CON/2003/27
of
2
the foreign reserves of the Federal Republic of Germany, shall arrange for the
execution of domestic and crossborder payments and shall contribute to the stability of
payment and clearing systems. In addition, it shall fulfil the tasks assigned to it under
this Act or other legislation.” (emphasis added)
The main proposals contained in the opinion were to safeguard the performance of the
functions of the Bank in its capacity as a member of the European System of Central
Banks (ESCB). The ECB’s opinion has been satisfactorily addressed; before deciding
whether or not to give approval to the Board’s provision of funds to the regulatory
authority, the Minister for Finance is required to consult the Governor and the Governor
may express his or her opinion on the amount of funds concerned, so far as it could
affect (i) the carrying-out by the Bank of its obligations with respect to the promotion of
the financial stability of the State, and (ii) the performance of the functions of the Bank
in its capacity as a member of the ESCB. In approving any amount of funds to be
provided by the Board to the regulatory authority, the Minister is required to have
regard to the functions and powers of the Bank under the Treaty and the Statute of the
ESCB.
The proposal to amend the Suomen Pankki Act, on which the ECB delivered a first
opinion, suggested limiting Suomen Pankki’s ability to make financial provisions. It
further suggested transferring the whole annual profit of Suomen Pankki to the State
unless the Parliamentary Supervisory Council decided otherwise, as well as transferring
around €740 million of the capital to the State, which would have forced Suomen
Pankki to sell foreign reserve assets. The ECB objected to the proposal primarily
because of the combined effect of the suggested amendments on the financial situation
of Suomen Pankki and the lack of any statutory safeguards ensuring the performance of
ESCB tasks, which together would undermine the financial independence of Suomen
Pankki. In December 2003 the ECB was consulted on a revised government proposal to
amend the Suomen Pankki Act. In a second opinion, the ECB welcomed the fact that
the final legislative proposal submitted to the ECB did not reduce the capital of Suomen
Pankki. However, the ECB noted that the requirements for financial independence were
not fully satisfied and that the proposal was therefore still incompatible with the Treaty
and its intentions. Following the second opinion, the legislative proposal was
withdrawn.
The main proposals and follow-up were:
1. No commitment of the OeNB to make contributions to the Foundation: the wording
of the relevant provisions of the draft law, on which the ECB was consulted, is
substantially the same as in the final Act, so that the discretion of the OeNB to make
contributions to the Foundation was not included in the Act.
2. Preference to financing ESCB functions and tasks or losses of the OeNB: the
provision suggested by the ECB, whereby contributions to the Foundation by the OeNB
would be subordinate to any financial needs relating to the ESCB’s tasks and functions
and to the need to cover potential losses of the OeNB, was not included in the Act.
18
6.
Finland: ECB opinion CON/2004/1 of 20 January
2004
Measures affecting Suomen Pankki’s
financial position and provisions relating to
its power to issue norms
See follow-up to No 4.
7.
Italy: ECB opinion CON/2004/16 of 11 May 2004
Protection of savings.
This ECB opinion was the first of several opinions on the same draft law, which
underwent a long and complicated legislative process eventually leading to the adoption
of Law No 262/2005 on the protection of savings (see also CON/2005/34,
CON/2005/58 and CON/2006/44 on the amended Statute of the Banca d’Italia).
The draft law also aimed at the removal of
the incumbent Governor.
8.
Hungary: ECB opinion CON/2004/35 of 4
November 2004
Monetary policy decision-making
9.
Slovakia: ECB opinion CON/2005/26 of 4 August
2005
Národná banka Slovenska’s tasks in relation
to integrated supervision of the whole
financial market and amendments to its
statutes
10.
Poland: ECB opinion CON/2006/15 of 9 March
2006
Integration of banking, capital markets,
insurance and pension funds supervision
11.
France: ECB opinion CON/2006/32 of 22 June
2006
Amendments to the statutes of the Banque
de France
The mandate of the Governor is now six years, renewable once, and his removal is
subject to Article 14.2 of the Statute of the ESCB.
The main proposals contained in the opinion were to protect the personal independence
of the Monetary Council members. The ECB opinion was accepted in as far as the
Monetary Council members were allowed to continue to perform their duties until the
end of the term of office for which they were appointed.
However, the ECB opinion was not followed as regards how the vacancies in the
Monetary Council were to be filled (the “en bloc” system prevailed).
The main proposals contained in the opinion were to harmonise the provisions of
national law regarding the grounds for dismissal with Article 14.2 of the Statute of the
ESCB. The ECB opinion was not accepted as far as the grounds for dismissal of the
board members other than the Governor were concerned.
The recent Act No 566/1992 Coll. as amended still contains the same grounds for
dismissal as were stated in the Act at the time of adoption of ECB opinion
CON/2005/26, which are not fully in line with Article 14.2 of the Statute of the ESCB
(in particular sub-paragraphs (a) and (c) of Article 7 (9) of Act No 566/1992 Coll. as
amended).
The ECB opinion played a role in modifying the original proposal for a supervisory
reform, as presented by the Government. This original governmental draft foresaw
integration of all financial supervisory powers (including banking supervision, as
currently exercised by Narodowy Bank Polski (NBP)) in a single one-person
supervisory authority with wide competences and almost no link to the central bank.
After the issuance of the ECB opinion, the draft law was modified to provide for the
creation of a collegial supervisory body (the Financial Supervision Commission, FSC),
in which the NBP Governor is represented and which is expected to enter into
information-sharing arrangements with the NBP. Hence, a minimum level of NBP
involvement in the supervisory practices, as recommended by the ECB, has been
ensured.
The main proposals contained in the opinion were to protect the institutional
independence of the Banque de France and personal independence of the Monetary
Policy Council (MPC) members. The ECB welcomed the abrogation of the MPC since
it reflects in the Statute of the Banque de France the reality of the transfer of monetary
19
policy powers to the ECB. From the perspective of the Banque de France, this
abrogation was also aimed at reducing the costs relating to the remuneration of the
members of the MPC. The ECB opinion was accepted with reference to the deletion of
Article 7 of the draft law concerning payment of dividends by the Banque de France,
which would have been automatically increased by the amount of savings resulting
from the law. The ECB opinion considered that this provision would in particular
enable the French authorities to interfere with the allocation of profits and affect the
institutional independence of the Banque de France. The ECB opinion was also
accepted regarding recommended clarifications of the text of the draft law.
12.
Greece: ECB opinion CON/2006/38 of 25 July
2006
Establishment of a consumer protection
regime within the scope of the Bank of
Greece’s prudential supervisory role and
other related provisions
13.
Italy: ECB opinion CON/2006/44 of 25 August
2006
General revision of the statutes of the Banca
d’Italia
14.
Czech Republic: ECB opinion CON/2006/47 of 13
September 2006
Certain Česká národní banka tasks in the
area of consumer protection
However, the ECB opinion was not followed as regards the term of office of a member
of the Monetary Committee replacing another member who is unable to complete
his/her term of office. The opinion considered that such term should be brought into
line with the requirements of Article 14.2 of the Statute of the ESCB, since the same
rules for the security of tenure of the office of Governor should apply to other members
of the decision-making bodies of NCBs involved in the performance of ESCB-related
tasks. However, the law provides that a person replacing another member shall hold the
office only for the remainder of the term of the member replaced. This provision is not
in line with the Treaty or the Statute of the ESCB.
The main proposals contained in the opinion concerned the transparency of transactions
in financial products and services, and the protection of consumers entering into
transactions with entities supervised by the Bank of Greece. The ECB noted that
commitment to new tasks should be without prejudice to the Bank of Greece’s
operational capacity to carry out ESCB-related tasks.
The draft is still with the Ministry of Development; no significant progress has been
made.
The main proposals contained in the opinion were to ensure the personal independence
of the members of the Directorate and to protect the Eurosystem audit under Article
27.1 of the Statute of the ESCB. The Statute of the Banca d’Italia reflects all
suggestions contained in the ECB opinion, in particular: i) Article 17 includes a
reference to Article 14.2 of the Statute of the ESCB also for the members of the
Directorate who may potentially have to deputise for the Governor, as suggested in
paragraph 3.3 of the ECB opinion; and ii) Article 19 explicitly mentions that the
activity of the Board of Auditors is without prejudice to the activity of the external
auditors in accordance with Article 27 of the Statute of the ESCB, as suggested in
paragraph 3.2 of the ECB opinion.
The main proposals contained in the opinion concerned the allocation of new tasks to
Česká národní banka (ČNB). The relevant law, which includes the amendment to the
Law on Česká národní banka submitted for consultation, has not yet entered into force.
It has been approved by the lower chamber of the Parliament in a form which, as far as
the amendment to the ČNB Law is concerned, does not substantively differ from the
20
text submitted to the ECB for consultation.
In its opinion, the ECB noted that ČNB will be required to commit additional resources
to carrying out the new tasks and that the Czech Republic will therefore need to ensure
that the performance of these additional tasks does not affect ČNB’s operational
capacity to carry out ESCB-related tasks.
15.
Poland: ECB opinion
November 2006
CON/2006/53
of
16
Supervision of clearing and settlement
operators
The ECB recommended that Narodowy Bank Polski be made expressly responsible for
the oversight of all securities clearing and settlement systems operating in Poland and
given access to all information and data relevant to the performance of such oversight
tasks.
This ECB recommendation has not been followed.
16.
Germany: ECB opinion CON/2007/6 of 7 March
2007
General revision of the Law on the Deutsche
Bundesbank relating to the reduction of the
number of members of the Executive Board
of the Deutsche Bundesbank from eight to
six
The main proposals contained in the opinion concerned the personal independence of
the Executive Board members. The ECB opinion was fully accepted.
The law did not affect the tenure of office of the Executive Board members of the
Bundesbank, since the end of the transitional regime (30 April 2009) coincides with the
expiry of the terms of office of two current Executive Board members.
21