FRANKFURT (MNI) – The Eurozone’s sovereign debt crisis has shown
that financial stability and monetary policy are interlinked and central
banks must take on the additional task of ensuring financial stability
in the future, Bank of International Settlements Managing Director Jaime
Caruana said Thursday.

Speaking during colloquium here on the “The Great Financial
Crisis”, Caruana said that while central banks will have to work closely
with government agencies to ensure financial stability, this will not
impact their independence.

“Recent events in the sovereign bond markets underscore that
financial instability can put the monetary transmission mechanism at
risk, and confirm that the two objectives are interrelated,” Caruana
said.

“Central banks must have realistic financial stability objects that
are consistent with their primary monetary policy responsibilities,” he
asserted.

Caruana conceded that “articulating a coherent financial stability
strategy is not easy,” as financial stability is less amenable to
precise specification and measurements than price stability.

In addition, “financial stability, unlike price stability is likely
to be a shared responsibility,” he noted.

“The decision of other government agencies, such as the fiscal
authorities, non-central bank supervisors and the competition
authorities, affect financial stability. The implication is that we
cannot define specific and quantifiable financial stability objectives
for the central bank alone,” Caruana said.

Finding the best way to organize such interaction will not be easy,
because the boundary between monetary policy and financial stability
objectives is “inevitably rather blurred,” he explained.

“The wider the scope of the central bank’s financial stability
mandate, the greater the scrutiny in the political process, and indeed
by the public itself, will be,” he observed.

Nevertheless, “greater interaction with the government need not
compromise central bank autonomy,” he said.

Greater clarity on a central bank’s financial stability mandate and
strategy will promote accountability, he said. Though “it is not
possible to set out measurable financial stability objectives, it is
possible to require clarity about actions and the decision-making
process.”

The financial crisis will have “significant implications for
central banks as public policy institutions,” he said.

In the future, they “will need to pay greater heed to financial
considerations in framing their monetary policy.” Indeed, “the synergies
that exist between monetary policy and financial stability are so great
that these policies are often difficult to separate in practice, as
recent events in European sovereign bond markets underscore.”

–Frankfurt bureau tel.: +49 69 720 142. Email: frankfurt@marketnews.com

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