TIE contributing editor Klaus Engelen interviews Andrew Crockett, General Manager, Bank for International Settlements.
TIE: As general manager of the Bank for International Settlements, you are running what some call the "Bank of Central Banks, "an institution very much focused on monetary stability. As chairman of the Financial Stability Forum, your focus is on securing financial stability. What comes first, monetary of financial stability?
AC: There can, of course, be no debate about the importance of the twin goals of price stability, on the one hand, and the stability of the financial system on the other. What is less well understood is the relationship between them.
TIE: How do you define the relationship?
AC: It is an issue that is both important and timely. Important because we need to ensure that arrangements for the pursuit of price stability do not inadvertently endanger the stability of the financial system. And we need to ensure that financial system weaknesses do not impede the effective operation of monetary policy. Timely because the new Basel Capital Accord is focusing additional attention on the issue of systemic risk. Moreover, in a number of countries, responsibility for the supervision of financial institutions has been moved from the central bank to an independent regulatory authority, with the central bank itself retaining a more general responsibility for overall systemic stability. Australia and the United Kingdom are perhaps the clearest examples of such a shift, but similar moves have taken place in Korea, Hungary, and a number of other countries. These institutional changes have sparked a lively debate about the appropriate institutional framework for monetary and financial stability policies. I would argue that the terms of this debate are too narrow. What matters is not so much the institutional division of responsibilities. It is rather the nexus between monetary and prudential policies and how to devise a set of arrangements that can promote both. The channels of causation run in both directions and take many forms. In implementing prudential policies, supervisory authorities may require a keener recognition that some of the main roots of systemic instability have been macroeconomic. One common macroeconomic element behind overextension in the financial system has been misjudgements about the economy's potential growth rate--a major factor in Japan in the 1980's and in Southeast Asia in the mid-1990's. Another element is that financial market sentiment tends to move with the business cycle. Many of the dilemmas of policy arise because it is difficult in practice to distinguish what is cycle and what is trend.
TIE: What was your impression of the latest spring meetings in Washington?
AC: The meetings in Washington were very productive. The atmosphere was good and there was general agreement that medium term economic prospects were reasonably promising.
TIE: What do you consider to be the achievements of the Financial Stability Forum?
AC: I think the main achievement is that we have now created a permanent group in which all of those authorities and groupings responsible for financial stability meet on a regular basis. That is to say, the finance ministry, central banks, and top regulators of the G7 countries, along with the Basel Committee, the IOSCO, the IAIS, and the international organizations (IMF; World Bank and so on).
As to the nature of the Forum, former U.S. Treasury Secretary Larry Summers came up with the analogy to compare the Financial Stability Forum to the Working Party III of the OECD, a body that he chaired. The Working Party III doesn't take any decisions, but is a forum in which the representatives of the major countries can sensitize each other to concerns and developments that affect the macroeconomy, and particularly macroeconomic interactions through balance of payments and so on. …