Transparency, Accountability and Central Banking

27 May 2020 Blog

Governor Gabriel Makhlouf - Whatever we face in the coming months and years, the Central Bank will always act in the public interest.

This morning we published our Annual Report and Annual Performance Statement 2019, an important part of our accountability framework and an important mechanism to enhance our credibility and effectiveness. I have spoken previously about the importance of enhancing trust through better central bank communication. A key point I made then was transparency, honesty and engagement help to build credibility and to set expectations. And credibility and trust are essential elements for policy to be effective.

This hasn't been the view historically. In the past, central banks used to ask themselves if there was a good reason to communicate something; now they rather ask whether there is a good reason not to communicate (Skingsley, 2019). This is a very welcome and essential change.

To see why, one only has to consider the scale of the current pandemic, or the 2008 financial crisis, and the very significant coordinated actions taken by central banks to protect/support the global economy, businesses and households against the worst effects of these crises.

It would simply not be sustainable to make policy decisions of such magnitude without explaining them to parliaments, markets, and to the community as a whole.

Central banks have been delegated functions of the State. We make decisions that affect everyone in society and we do so based on evidence with the goal of protecting the community. Therefore we also have a duty to explain our decisions, to set out the context in which they are being made, the evidence on which we base them, and help people understand why we're making them and what we're aiming to achieve.

This helps to build trust and ensure policy can be effective. Take the mortgage measures for example. These are designed to protect the community from excessive lending and excessive borrowing. If people understand the reasons for the mortgage measures (that is, the risks of excessive indebtedness), the more effective the policy will be. And similarly, if firms understand the benefits of resilience, for example, the more effective our policies will be. Because in addition to the rules we impose on firms (like capital, liquidity and governance requirements), the objectives of our policies (like better risk management and consumer focus) will become embedded in the cultures of financial services firms themselves, and so further protect the community.

So how do we ensure that we are transparent and accountable? First, by having the Central Bank's senior leadership appear before the Oireachtas. We also explain ourselves through various channels such as this blog, or through speeches which can be accessed by all members of society. We publish reports to outline our views or decisions across various aspects of our mandate, for example through our Financial Stability Reviews and Quarterly Bulletins.

This has become more important than ever given the pandemic.

Of course, like any area of policy or politics, people often want quick and simple answers. The American journalist and satirist H.L. Mencken once supposedly quipped that "for every complex problem, there is an answer that is clear, simple and wrong". It is human nature for people to seek truth and certainty. Like most aspects of life, central banks invariably cannot deliver on this, but we can explain why we can't.

Looking Back—the Central Bank's 2019 Annual Report

So, back to our Annual Report. We are required to produce and present it to the Minister for Finance within six months after the end of each financial year.

Today's report sets out in detail what we at the Central Bank did in 2019 to safeguard price and financial stability and to ensure that citizens are protected in their interactions with the financial system. It shows how we have delivered upon our 2019–2021 Strategic Plan and it also details our financial results, including that we will transmit about €2bn surplus income back to the Exchequer.

Our efforts in 2019 have continued to focus on increasing protections for consumers, strengthening the solvency and stability of the banking sector and wider financial system, enhancing regulatory oversight, and introducing more effective recovery and resolutions regimes. A sound and resilient financial system matters to the community. The initial resilience of the system to the shock of COVID-19 is a testament to the collective efforts of households, firms and regulators, in both Ireland and Europe.

But there are many twists and turns to travel yet.

Looking Ahead

As I mentioned last week, our attention is turning to issues like the scarring effects of COVID-19 on the economy, the impact it may have on global interconnectedness, and wider issues like the UK's withdrawal from the EU.

We will shortly publish our Financial Stability Review which details the risks posed to domestic financial stability stemming from the sudden halt in domestic activity, financial market developments, and structural vulnerabilities of our small open economy. We will also publish our next Quarterly Bulletin which will outline our latest scenarios for the economy.

Policymakers in Europe, and around the world, have taken extraordinary actions in the face of the economic shock from COVID-19. Whether that means fiscal policymakers supporting individuals and firms or monetary policymakers ensuring financial and price stability, credibility and trust are, and will continue to be, key. For central banks in particular, the public must trust us to act in their best interests when we make such significant decisions.

Our job in the Central Bank of Ireland is to maintain stability and protect the community. Whatever we face in the coming months and years, the Central Bank will always act in the public interest. In the words of our founding legislation, the Central Bank's "constant and predominant aim shall be the welfare of the people as a whole". This is what motivates our people to bring their expertise, their professionalism and their commitment to work every day. It is also why I think it is important for the Central Bank to be well-connected to the community across the length and breadth of Ireland, listening and learning about the issues households and firms are facing, and explaining what we do and why we do it.

Our engagement programme has been interrupted by the restrictions following the pandemic but we hope to return to it soon.

Gabriel Makhlouf

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