Question
Following a financial crisis, the authorities in Ruritania have decided to overhaul the institutional architecture for financial stability. The broad outlines of the reform have
- Following a financial crisis, the authorities in Ruritania have decided to overhaul the institutional architecture for financial stability. The broad outlines of the reform have been agreed upon and approved by parliament. The legal mandate for financial stability will be assigned to a National Financial Stability Council (NFSC), which will include the central bank (responsible for monetary policy and bank supervision); the insurance regulator; the capital markets authority; and three independent external experts. The NFSC will be chaired by the Minister of Finance and will have broad authority to request data and information. It will also analyze financial sector vulnerabilities and resilience and publish regularly a Financial Stability Report.
However, a disagreement has emerged on the powers of the NFSC. The Minister of Finance wants the Council to have the power to take macroprudential policy measures itself or direct its constituent agencies to take such measures if justified on financial stability grounds. The Governor of the central bank is adamantly opposed: if the Council is given the power to direct the central bank to take policy action, regardless of the justification, this would compromise the central bank's independence. Instead, the Governor is proposing that the NFSC be limited to providing a general assessment of the current state of financial sector vulnerabilities and leave the policy - making entirely to the discretion of each of its constituent agencies.
The Ruritanian authorities have turned to your international organization for advice. You are the head of the Ruritanian desk. Provide a recommendation to the authorities and explain it based on the globally accepted criteria for an effective macroprudential policy framework
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