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    The Financial Stability Committee

    Fatih Özatay, PhD14 February 2012 - Okunma Sayısı: 1131

    In order to serve its purpose, the Financial Stability Committee must be revised in terms of its governance structure.

    In the light of the lessons learned after the global financial crisis, it was argued that central banks shall play a bigger role in preventing, managing and solving crises. Many economists have been pondering on this issue, and as a result a number of studies emerged. In this context, I have been discussing for a long period how macroprudential financial policy and monetary policy can be implemented simultaneously.

    The discussion brought me to the question, “What are the institutional arrangements needed in this framework?” I set forth three options for Turkey: First was to transfer macroprudential powers of the Banking Regulation and Supervision Agency (BRSA) to the Central Bank of Turkey (CBT). Second was to unite the BRSA and the CBT under a single organization. Third was to protect the status quo in Turkey, an option I did not recommend.

    Please let me note one thing now, having talked about the “status quo”. On July 8, 2011, a new regulation was introduced to establish the Financial Stability Committee. This way Turkey as well others took a step towards the implementation of macroprudential financial policies, changing the status quo up to that date. Establishing such committees was an option the world has been discussing in the context of possible institutional regulations to implement macroprudential financial policies. Therefore, the status quo now in Turkey was the fruit of a step in the right direction. Still, it is far from satisfactory.

    Here is the status quo I am talking about: The Financial Stability Committee consists of the head of the Undersecretary of Treasury, head of the BRSA, governor of the CBT, head of the Capital Markets Board, and head of the Savings Insurance Deposit Fund (SIDF). The Committee is headed by the Minister responsible for the Treasury. The Committee was established as per the provisional article 4 of the Decree Concerning the Organization and Powers of the Ministry of Economy. This is a short article which judges the duties and the members of the Committee. I argued that the Committee might be harmful to the independence or autonomy of the named agencies and thus I did not recommend such setting. The mentioned regulation has a fundamentally critical deficiency. It only judges the duties and the members of the committee; it does not answer the following questions which are of vital importance:

    Will this committee be a decision-maker or an advisory committee? If it will be a decision-maker, how the decisions will be made and how the independence/autonomy of member agencies will be secured? How will the laws of relevant agencies be revised? If it will be advisory, what will happen when the advised agency does not follow the advice of the committee? Will the advised steps be disclosed to the public? Who will be responsible for disclosure and announcements? Will the relevant agency declare why the advice was not followed? It might be necessary to make decisions advisory for some agencies and obligatory for others. Is there a clear distinction about this? Will be public be aware of such distinction?

    For a strong macroprudential financial policy at place, the Committee regulation must be revised to give satisfactory answers to above questions. These are not easy questions to answer, however. Thus, the other two options seem to be more feasible. For example, the UK is about to launch the second option: They decided to transfer the power to implement macroprudential and microprudential financial policies to the Bank of England. In other words, they are uniting the BRSA and the CBT of their own. Of course, this is just one of the options, not a must. It reflects a preference, just as the establishment of the Financial Stability Committee did in the case for Turkey. The problem is that, the latter does not have the governance structure it needs in order to serve its purpose. This is why the relevant structure must be revised. I will continue talking about this.

     

    This commentary was published in Radikal daily on 14.02.2012

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