|
|
Symmetry
First, reconsider the definition of price stability. Most central banks have a simple (in the jargon, symmetric) inflation target. The ECB’s however, is asymmetric, based on the concept of “below but close”. It is not well understood by the public or, to be honest, market participants.
When inflation hovered around 1 per cent in recent years, several academics and policy makers openly questioned the ECB’s view that given the circumstances it wasn’t sufficiently close to 2 per cent, and considered the prevailing policy stance as too accommodative. Furthermore, research shows that the ECB’s policy decisions over the years anyway reflect a symmetric interpretation of the target around 2 per cent. So why not move to such a target? It would at least be more transparent.
Unequal pillars
Second, the ECB should reconsider its so-called two-pillar strategy when assessing risks to price stability. The two pillars are analysis of economic and monetary data, but the latter — money and credit aggregates — have proved over time to be unreliable predictors of inflationary pressures. On certain occasions they may even have mislead policy makers.
Progressive haircuts, not floors
Third, is how the central bank treats collateral when attempting to stabilise markets. The ECB has adopted a comprehensive framework for counterparties’ use of collateral in the provision of central bank liquidity, but this relies heavily on rating agencies and market prices. The problem is that the rules may produce pro-cyclical effects, exacerbating a situation when the functioning of financial markets is threatened by fears about a borrower’s ability to repay debt.
Share risk, as well as supervision
Fourth, is the clashing structures of bank supervision and emergency support. Banks that are solvent, but do not have adequate collateral, may require the central bank to act as a so-called “lender of last resort”. That function for banks is still decentralized, with the national central banks bearing the risks.
Supervisory powers over the continent’s banks, however, have been centralized at the ECB since 2014. The governance of the provision of Emergency Liquidity Assistance needs to be aligned to the new single supervisory framework in the Eurozone. In particular, if the decision on whether a bank is solvent and is eligible to emergency lending is centralized, the risk for such lending should be shared.
Exit Troika stage left
Finally, there is the ECB’s membership of the so-called Troika, along with the IMF and the European Commission. The Troika designs and negotiates adjustment programs with EU member states in need of financial assistance.
The ECB’s participation was initially justified by a need to make sure financial stability considerations were appropriately accounted for in adjustment programs, in particular with respect to banks’ capital adequacy. However, since the creation of the banking union the ECB has acquired these powers. Remaining a member of the Troika is now less justified, and the unpopularity of adjustment programmes tends to erode the ECB’s reputation and independence.
Full article on Financial Times (subscription required)