Central Bank of Iceland vs Iceland’s largest fishing exporter: Case of lost reputation

Central banks are embroiled in all kinds of things.

Iceland government imposed capital controls in 2008 crisis with central bank incharge of their enforcement.

Jon Danielsson of London School of Economics in this article points how things went wrong for the central bank:

After the Icelandic crisis in 2008, the government was forced to implement capital controls, with the central bank in charge. The bank was the designer of regulations, the monitor of violations, and the authority in charge of enforcement. The governor became the currency market police chief.

The central bank concluded in 2012 that the country’s largest exporter, the fishing company Samherji, had violated the capital controls. The bank, in response, organised a police raid on Samherji’s headquarters, authorised by the deputy governor. The media were tipped off, and TV journalists accompanied the police on the raid.

The local media in Iceland had a field day, and the raid became global news. Not surprisingly, there was a significant reputational impact on Samherji, who did not take this sitting down.

The central bank, having concluded there were sufficient grounds for prosecution, passed the case to the prosecuting services, but the prosecutors disagreed and dropped the case. The bank then used its regulatory powers to impose a fine on Samherji, who challenged the fine.

Eventually, towards the end of last year, the Supreme Court ruled in favour of Samherji.  Early this year, the parliament ombudsman criticised the central bank’s handling of the dispute, concluding that the bank had not followed the correct law, and raising the question of whether the central bank itself informed the media before the raid.

Implications? Central banks who try do many things risk losing reputation:

There are good reasons for embedding regulations within the central bank: it is hard to separate monetary policy from macroprudential; macroprudential from microprudential; and all use similar tools and information.  

The conflict between Samherji and the Central Bank of Iceland highlights the associated risks. The more power the central bank accumulates, and the more it gets involved with the day-to-day regulations, the greater the scope for conflict and the more likely it is that central bank independence obstructs their successful resolution.

The reputation risk for the central banks increases along with its power, and paradoxically it may make the central bank less willing to act, and hence a less effective authority than a regulator with political oversight, as noted by Chwieroth and Danielsson (2013). 

Any sufficiently large and unresolved conflict risks either an erosion of the central bank’ independence or regulatory paralysis.

Hmm..

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