Central Bank Independence

Below is a case study on central bank independence. Read it carefully and answer the

questions that follow.

There is a bank which is known to violate all the rules set forth by the central bank. The

supervision department is aware of the irregularities at the bank. The department is

also aware that if things are left unchecked at bank X$,$ the whole financial sector will

collapse. Remember, banks do not operate in isolation. Irregularities done in one bank

can affect the whole financial sector. However, the central bank$$s supervision

department has been warned not to visit bank X for supervision. What actually

happened is that there was a rumour that the central bank$$s supervision department

was moving in to take over the bank due to irregularities which have surfaced. The

chairman of bank X then contacted his $$connections$$ to stop any effort by the central

bank to take over the bank. The supervision department complies and does not visit

bank X$.$ It turns a blind eye as if nothing is happening at bank X$.$ A few months down

the road, bank X collapses and the whole financial sector is in a crisis. The newspapers

and the public blame the central bank for lack of foresightedness to prevent the

collapse of the bank. They are also calling for the staff in the supervision department to

be fired from their jobs. The central bank, due to pressure, fires the whole supervision

department including its director.

REQUIRED:

a$.$ Discuss functions of the bank supervision department of the central bank.

b$.$ Explain what is meant by central bank independence.

c$.$ With reference to the above passage, discuss the disadvantages of nonindependence of the central bank.

d$.$ Discuss the extent to which the Bank of Botswana is independent.