Bundesbank symposium highlights frontiers in central banking

To mark its 60th anniversary, the Bundesbank held a high-level symposium in Frankfurt am Main on the future of central banking. During the symposium, which was entitled "Frontiers in Central Banking – Past, Present and Future", participants highlighted the benefits and constraints associated with non-standard monetary policy measures, the economic consequences of interaction between central banks and governments and the impact of new financial technologies.

Central banks as crisis managers

In his welcome address, Bundesbank President Jens Weidmann highlighted how modern central banking has been shaped by crises, adding that this also applies to the Bundesbank's mandate, which was influenced by the fact that the German population had lost their savings twice in the first half of the 20th century. "When the Bank was established exactly 60 years ago, there was a broad understanding that its primary objective should be to ‘maintain monetary stability'," he commented. He went on to point out that, following its experience of hyperinflation and currency reform, it was generally appreciated by the German public that the Bundesbank interpreted its mandate as meaning that it should maintain price stability.

Observing that the financial and economic crisis that broke out in 2008 had prompted central banks worldwide to intervene on a massive scale by cutting interest rates and taking non-standard measures, Dr Weidmann reported that monetary policymakers in the euro area had repeatedly come under pressure to prevent the crisis from escalating. "Sometimes they went to the very limits of their mandate", he stated.

President Weidmann voiced criticism regarding large-scale sovereign bond purchases. "In a currency union like the European one, with a single monetary policy but national economic and fiscal policies, sovereign bond purchases blur those all-important boundaries between monetary and fiscal policy," he explained, going on to say that this could lead to political pressure being exerted on the Eurosystem to maintain its ultra-accommodative monetary policy stance for longer than necessary.

Benefits and constraints of non-standard monetary policy

Other participants in the symposium echoed this critical stance towards non-standard monetary policy. Axel Weber, Mr Weidmann's predecessor in his position as Bundesbank President, warned of the costs of this policy. These included misallocating capital, with its detrimental effects on financial stability, and throwing a lifeline to failed enterprises and governments. Mr Weber was furthermore keen to stress the significant distributional effects of a prolonged period of non-standard monetary policy, opining that such an approach serves to widen the gap between recipients of capital income and labour income. Last but not least, he expressed his fear that non-standard monetary policy could pave the way for a new crisis.

Jean-Claude Trichet, former President of the European Central Bank, identified one of the most important consequences of the crisis as the fact that the largest central banks of the industrial nations have now united around very similar nominal inflation targets. He took a critical view of behaviour prior to the crisis, when scant attention had been paid to credit growth when assessing the monetary policy situation – an absurd situation that, in his words, has been righted in the wake of the crisis.

The hot potato of policy intervention

Numerous participants in the symposium expressed concern that it was the central banks, in particular, that were turned to for aid in times of crisis. Christine Lagarde, Managing Director of the International Monetary Fund, believes that this stems from central banks' capacity to respond quickly and effectively, whereas the political process is more complicated and slower in moving forward. Ms Lagarde advocated a comprehensive monetary and fiscal policy approach, combined with structural reforms. Citing positive examples, she referred to the G20 summits of 2008 and 2009 in Washington and London as well as the European Union's €200 billion economic stimulus package, commenting that central banks should not be left to sort things out alone when it comes to the "hot potato" of policy intervention.

Jaime Caruana, General Manager of the Bank for International Settlements, takes the view that, despite a degree of progress, political decision-making remains too focused on the short term overall. In his opinion, this harbours the risk of insufficient attention being paid to longer-term problems such as a build-up of financial stability risks or excessive debt. "If we indulge in political sprints, we eventually run the risk of minimising our political leeway," explained Mr Caruana

Competition from fintechs

The symposium also addressed the matter of new technological developments arising for central banks as a result of digitalisation. Bundesbank Vice-President Claudia Buch emphasised that knowledge of the effects of new, technology-driven financial innovations, known as fintechs, is still very limited due to a lack of data on the subject. She regards the link between competition and financial stability as an interesting point of departure, observing that intensified competition for traditional banks from fintechs could result in efficiency gains whilst also, however, stoking their risk appetite if margins were to come under pressure.

Ravi Menon, Managing Director of the Monetary Authority of Singapore, called for the introduction of appropriate regulation for fintechs: "Just as it makes no sense to subject a light bulb to the same regulations as those that apply to a power station, a payment services provider and a universal bank should not be held to the same standards."

Dr Weidmann looked at technological developments with the prospect of a central bank-issued digital currency in mind. This would mean that enterprises and households would have access to a central bank's balance sheet without the noteworthy storage costs that are associated with holding cash. "What might appear intriguing from a technological point of view raises fundamental questions about the nature of the financial system and our economy at large," he opined. It would be possible to exchange bank deposits for the secure, official digital currency at the push of a button. "But what might be a boon for savers in search of safety might be a bane for banks, as this makes a bank run potentially even easier," he warned.

According to Dr Weidmann, central banks should strive to make existing payment systems more efficient and even faster than they already are. In concluding his speech, the Bundesbank President remarked: "I am pretty confident that this will reduce most citizens' interest in digital currencies."