Thinking about financial independence of central banks…

Central bank independence is perhaps one of the most discussed economics topics. Econs have  divided central bank indep into two parts: goal independence and instrument independence. Goal means what a central bank should so and instrument is a way to achieve goals. In an optimum case, governments set goals and let central banks set instruments to achieve those goals. However, one sees central banks getting into setting goals and governments interfering in instruments leading to all kinds of frictions.

There is another dimension of independence which is missed- financial independence. Do central banks have enough resources of their own to sustain their operations? Or are they reliant on regular support from Government to run the show.

This note from ECB discusses financial independence of Sweden’s Riksbank:

On 21 March 2017 the European Central Bank (ECB) received a request from the Swedish Ministry of Finance for an opinion on a draft legislative proposal concerning the financial independence and balance sheet of Sveriges Riksbank (hereinafter the ‘draft legislative proposal’).

ECB says it has pointed earlier as well that Riksbank should seek more financial independence:

The ECB recalls that it has repeatedly pointed out in its convergence reports that Sweden needs to adapt its legislation governing the Riksbank to comply with Treaty requirements related to, inter alia, financial independence and the distribution of profits30. The ECB recalls that both the ECB and its precursor, the European Monetary Institute, have issued several opinions in response to consultation requests from the Swedish Ministry of Finance and the Parliament which have considered matters relating to the financial independence of the Riksbank.

The independence of an NCB, as required under Article 130 of the Treaty and Article 7 of the Statute, would be jeopardised if it could not autonomously avail itself of sufficient financial resources to fulfil its mandate (i.e. to perform the European System of Central Bank (ESCB)-related tasks required of it under the Treaty and the Statute). The principle of financial independence also implies that an NCB must have sufficient means to perform not only its ESCB-related tasks but also its own national tasks, e.g. financing its administration and own operations32. Therefore, a Member State may not put its NCB in a position where it has insufficient financial resources and inadequate net equity to carry out its tasks. For all these reasons, financial independence implies that an NCB should always be sufficiently capitalised. Financial independence requires that in performing its tasks an NCB can independently assess the risks involved and has the power to decide on any necessary precautions to take. An NCB is best placed to make these assessments and needs to have the necessary tools to evaluate the relevant circumstances and to make forecasts.

The whole document is an interesting reading and an aspect of central banking which is highly important but seldom discussed..

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