Responses by central banks and banking supervisors
While responsibility for financial stability remains vested in the national authorities – even in the countries participating in Stage Three of Economic and Monetary Union (EMU) – the need for co-operation among national authorities has increased because of the concerns I have just mentioned. In fact, EU authorities have shown awareness that close co-operation is essential both for a strategy of risk reduction and for the prompt and effective management of any problematic events. Let me refer to some of the main issues pertaining to the activities of central banks and banking supervisors.
First, as to the Eurosystem responsibilities, the operational tools established for the common monetary policy allow market-wide liquidity shocks to be dealt with. The quick and successful reaction to the consequences of the terror attacks in the United States was a sign that the institutional framework is able to address the consequences of common shocks.
Already in the evening of 11 September, the ECB announced that it was ready to provide additional liquidity. Indeed, the euro money markets showed some signs of tension on 12 September, because of banks' caution about lending funds due to uncertainty regarding their own liquidity needs. The ECB ensured the availability of adequate liquidity through a quick tender operation, restoring a normal functioning of the market, in the same way as, for instance, the Federal Reserve accomplished this for the dollar money market. In addition, the ECB and the Federal Reserve Bank of New York negotiated a US dollar/euro swap agreement on 12 September. The purpose of the agreement was to channel US dollar funds to European banks, which are not counterparties of the Federal Reserve for its discount window operations. European banks faced difficulties in raising short-term US dollar funds due to the disruption in the US financial system.
Second, as to the co-operation between central banks and banking supervisors, the ECB, the national central banks and the banking supervisory authorities of all EU countries have recently signed a Memorandum of Understanding. It establishes arrangements for co-operation and sharing information with respect to risks in large-value payment systems.
Third, as regards banking supervisors, the EU Economic and Financial Committee has recently reached the conclusion – also endorsed by the finance ministers – that, while the existing institutional arrangements for supervision and crisis management are adequate, cross-border co-operation needs to be fostered. The co-operative bodies of banking supervisors in the European Union – the Banking Supervision Committee of the ESCB and the Groupe de Contact – are currently addressing this recommendation.
The opinion of the ECB is also that the existing arrangements can provide an adequate and flexible basis for safeguarding financial stability at the European level. We have also stressed that co-operation needs to be enhanced in order to ensure the effective execution of prudential supervision and corrective action in crises. For the single monetary policy, it is important that financial stability is effectively maintained.
Let me make some remarks also about the supervisory arrangements at the national-level. After the reform carried out in the United Kingdom to establish a single all-encompassing financial supervisory authority outside the central bank, proposals to set up a single supervisory authority have been put forward in several euro area countries. Tendencies to separate supervision from central banking have also emerged. In almost all euro area countries, central banks have traditionally been in charge of supervisory functions.
In some euro area countries, adjustments have already been made. In Austria, an all-encompassing financial supervisory authority will be established, but the central bank will still be in charge of certain banking supervisory tasks. In Luxembourg, a supervisory authority has been created outside the central bank. Changes are also underway or being discussed in Germany, Belgium, Ireland, and Finland.
The Eurosystem has recently expressed the view that continuing to have national central banks in charge of supervisory responsibilities would offer clear benefits. This would be an appropriate response to the challenges triggered by the euro, as it would enhance the capability to monitor risks to financial stability from an area-wide perspective. In any alternative arrangement, the involvement of central banks in prudential supervision and ample information sharing would be necessary in order to achieve the necessary interaction between the two bodies.
A central bank supervisor is in a position quickly to assess systemic risks. These could be generated, for example, by a failure of a large and complex financial institution through payment and settlement
BIS Review 91/2001