Central banks may need more power

FRANKFURT (Reuters) - Central banks might need more power to oversee banks if they are to play a larger role in maintaining financial stability in the post-crisis world, a Bank for International Settlements (BIS) report said on Sunday.

The report also said central banks should examine issues such as the make-up of policymaking bodies, their independence, voting habits and finances as their role evolves.

"The current global financial crisis could well have ... important implications for central banks, particularly with respect to their role in fostering financial stability," said the report, by the Central Bank Governance group.

"If central banks are to play a key role in dealing with systemic risk when applying a more macroprudential approach, they may also need to have closer oversight of systemically significant institutions."

But the report said there was no magic bullet for arranging central bank governance to deal with the new challenges, as their roles as well as political and economic conditions differ from each other.

"What is suitable for one country will not be for another. Hence, setting down a single set of best practices is not feasible."

Financial stability, for its part, would be difficult to codify in central bank objectives, as it is not as simple as naming a range for consumer price growth as an inflation target.

"Financial stability is ... somewhat incomplete as a guiding light for policy actions and as a basis for accountability," it said.

"Financial stability is not an absolute objective -- most economists would agree that financial variables should be flexible, and should change, and sometimes sharply. The question is by how much and in what circumstances."

Global policymakers have agreed that more comprehensive and cooperative financial supervision is one of the key lessons of the financial crisis, and the European Union has agreed a blueprint to create two new bloc-wide oversight bodies giving central banks a bigger say.

The BIS report said accountability and independence also have to be solved when thinking of central bank governance.

"One of the most challenging tasks in central bank design is to organise the governance structure in a manner that permits policymakers to meet their macroeconomic stabilisation objectives while remaining accountable for their actions."

The group in charge of the report was chaired by Guillermo Ortiz, Governor of the Bank of Mexico, and included policymakers from many major central banks, including Bank of England Governor Mervyn King, European Central Bank Vice-President Lucas Papademos and U.S. Federal Reserve Vice Chairman Donald Kohn.

(Reporting by Sakari Suoninen; Editing by Victoria Main)

Article Published: 17/05/2009