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10 October 2014

SNB's Danthine: Are central banks doing too much?


Speech by Jean-Pierre Danthine, Vice Chairman of the Governing Board of the Swiss National Bank.

In recent years, central banks have been active in their attempts to mitigate the financial crisis and its aftermath, and they have also assumed a more prominent role in the regulatory efforts to prevent similar crises in the future. This has led many commentators to ask the question I raised in the title of this speech: are central banks doing too much?

The short answer to the question - you may not be surprised - is "no". The measures which central banks have taken since the beginning of the financial crisis in 2007 are a direct consequence of the severity of the crisis itself. First, conventional central bank measures - cutting interest rates, providing liquidity and acting as lender of last resort - were required to prevent the collapse of the financial system. Second, the use of various unconventional measures was a responsible step to support weak recoveries, given the shortage of available alternatives. And third, a reinterpretation of central banks' financial stability mandate towards a more active role in crisis prevention is necessary to reduce the need for another round of extensive crisis management in the future.

This, in a nutshell, is the main argument of my speech today. In what follows, I will elaborate on the rationale behind the conventional and unconventional measures that central banks have adopted to mitigate the crisis, and explain why central banks need to play an active role in the new regulatory framework which is being implemented in response to the crisis.

Central banks may not exactly have a reputation for being big innovators. But just as the Foire du Valais has developed into French-speaking Switzerland's pre-eminent fair over the past 50 years by successfully combining innovation with its core strengths, central banks have evolved over the past few decades by remaining focused on their core mandate - price stability - while adapting to a changing environment and being open to learn new lessons when they present themselves. The financial crisis was such a moment, and a reinterpretation of central banks' financial stability mandate is an important lesson to take away from it.

Full article on Bank for International Settlements' website



© BIS - Bank for International Settlements


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