Each spring, the Economics Conference of the Oesterreichische Nationalbank (OeNB) provides a forum for policymakers, academics and the interested public to discuss topical issues in economic policy. This year’s conference theme is “Central Banking after the Crisis: Responsibilities, Strategies, Instruments.”
In his opening remarks, OeNB Governor Ewald Nowotny reflected on the long-run challenges central banks face due to their double responsibility for monetary and financial stability. There is now a consensus that regulation before 2007 had “failed to address the risks arising at the system level, risks that could not be seen by looking at individual institutions and individual markets alone. Within the regulatory frameworks currently being designed at the European and international levels, central banks will play a crucial role.”
This much reinforced responsibility for financial stability raises a number of questions for central banks, including, in particular, how central banks’ financial stability-related tasks can be delimited optimally from the responsibilities of regulatory agencies and how the good cooperation between agencies can be ensured. Central banks have their reputation at stake, which in turn forms the basis of independence: “Central banks have to earn their independence every day”, Nowotny asserted, continuing that independence had to be preserved as it “is a crucial ingredient of monetary stability,” as the Eurosystem’s success in keeping inflation low and stable since the introduction of the euro well demonstrated.” Nowotny went on that “independence is equally important in the area of financial stability, in particular macroprudential regulation,” to ensure that the right policy be pursued without giving any regard to special interest groups in the economy.
In terms of the strategies that central banks and regulators should adopt to prevent the recurring of financial crises, Nowotny pointed out that “better regulation of the existing financial system is not enough: More fundamental changes will be needed.” While “Austria fortunately has a rather conservative banking system – with very few and minor unfortunate exceptions that have been successfully dealt with in the past – it is obvious that at the global level, the financial sector over time has become dramatically bigger and riskier, the main drivers being excessive leverage and often dubious financial innovations.“ Therefore, Nowotny continued, “in the future it will not be enough to play around with some technical details of regulation; rather, we will have to ask – and to answer – more fundamental questions with regard to the size and structure of the financial sector.”
In the debate on the intervention of the Eurosystem in public debt markets, Nowotny underlined that it was the raison d’être of central banks to “provide liquidity in a moment of general uncertainty.” The important point, however, “is that while central banks can calm liquidity crises, they cannot resolve solvency crises.” Here Nowotny drew an analogy to the liquidity measures taken by central banks worldwide to help the banking system in 2008 and 2009: “Central banks did provide crucial temporary relief; but the long-run adjustments had to be made by the banking sector itself. In the current situation this means that the Eurosystem can ensure and will ensure that short-term volatility and speculation in financial markets do not derail the fiscal consolidation efforts in the euro area. Again, however, it is governments that have to ensure that their public finances again become sustainable in the long run.”
In his concluding words, Nowotny insisted on the need to keep “the roles in economic policy in the European Union clearly defined. “The primary objective of the Eurosystem is price stability.” In the current context of uncertainty, “providing confidence in the long-run stability of the euro is the best contribution the ECB can make to foster economic stability and growth and thereby sustainable public finances.” He concluded: “Be assured that the Eurosystem will stay the course.”