Central banks may need ’more authority’

Bloomberg

"If central banks are to play a key role in dealing with systemic risk when applying a more macro-prudential approach, they may also need to have closer oversight of systemically significant institutions," the Basel-based BIS said in a report published yesterday.

Policy makers are examining ways to regulate financial markets after the collapse of Lehman Brothers Holdings last year threatened to bring down the global banking system.

As the credit crunch sparked by the U.S. mortgage crisis erased about $1.5 trillion from balance sheets worldwide, central banks and governments from London to Washington have stepped in to rescue financial institutions.

U.S. Treasury Secretary Timothy Geithner said on May 9 that a single supervisor needs the authority over the biggest financial firms.

Still, questions remain as to which regulatory bodies are best suited to oversee companies whose health poses system-wide risks.

In a 2008 survey by the BIS, 90 percent of central banks considered that they had "full or shared" responsibility for financial oversight.

"Apart from the lender of last resort function and various regulatory powers, there are no central bank policy instruments that are uniquely suited to ensuring systemic financial stability," the BIS report said.

Policies pursued for stability may cause conflict
At the same time, there may be an unintended "conflict" between policies aimed at ensuring financial stability and monetary stability, according to the BIS.

"The potential for such conflict may reappear when the time comes to exit from aggressively stimulative policy settings," it said. "Early removal of stimulus could delay the resumption of normal market functioning; late removal could risk the takeoff of inflation." In the U.S., lawmakers and some regulators have shifted away from the view that the Federal Reserve should take the job. Federal Deposit Insurance Corp. Chairman Sheila Bair and Securities and Exchange Commission Chairman Mary Schapiro this month recommended that a council of regulators assume the role.

The report was prepared by a group of central bank governors under the guidance of Guillermo Ortiz, the head of Mexico’s central bank and chairman of the board of directors for the BIS.

Other members of the group include Bank of England Governor Mervyn King, European Central Bank Governing Council member Lucas Papademos, Fed board member Donald Kohn and China’s central bank Governor Zhou Xiaochuan.