22.12.2020
Testimony by the Governor of the Banco de España before the Audit
Committee on Democratic Quality, the Fight against Corruption, and
Institutional and Legal Reforms
Congress of Deputies
Pablo Hernández de Cos
Governor
Ladies and gentlemen,
I appreciate your request that I should appear before this Audit Committee on Democratic
Quality, the Fight against Corruption, and Institutional and Legal Reforms to address the
question of the impartiality and autonomy of independent economic authorities.
Allow me to take as a starting point for my address the importance the economic literature
has attributed in recent decades to the quality of institutions, as a linchpin of economic
development and growth.
As part of this broad notion of the quality of institutions, independent agencies - over
which governments have no controlling or management powers - are particularly important
for achieving certain goals. Indeed, in some areas of the economy independent institutions
have a long-standing tradition in market economies and are a basic pillar of their institutional
structure.
The rationale behind such institutions lies in considerations of general interest, with the
conviction that independence allows a greater benefit to be had for society than that which
would be attained were powers assumed directly by political authorities.
Independent agencies acquire this status by decision of the maximum political
authorities of the State (parliaments), and are given a remit in specific decision-making
areas (for instance, monetary policy for central banks) and a legal framework to decide and
act independently in the matters under their purview.
The public interest objective underlying the status of independence leads me to view it as a
value that should be preserved and strengthened, for the benefit of properly fulfilling the
mission with which the agency has been entrusted and, thereby, of greater social well-being.
In any event, independence should be accompanied by guarantees as to the
professional competence and personal integrity of the members of the independent
body, especially its senior officials, and as to the controls to which it is subject and its
accountability. To attain these guarantees, controls and accountability, action must be
taken on selection, appointment and dismissal procedures for individuals in management
and governance positions in the independent body, on the transparency of conduct and
results, and on the governance of the institution.
I shall commence by reviewing the arguments that justify the independence of economic
authorities and supervisors. I shall then address the elements that give shape to an
institution's formal independence, and their specific configuration in the case of the Banco
de España. Thirdly, I shall offer my thoughts on the status of independence as a necessary,
but insufficient, condition for independent agencies. I shall then highlight potential ways to
strengthen the independence of the Banco de España, moving on thereafter to identifying
potential improvements to the financial supervision model in Spain. Lastly, I shall refer to
our institution's control mechanisms and transparency standards, and certain governance
aspects.
1 The value of independence in economic authorities and supervisors
In the area of the economy, monetary policy and financial supervision are two of the spheres
habitually occupied by independent institutions in the developed countries.1 In our case, for
the euro area, the European Central Bank (ECB) - of whose system the Banco de España is
a part - is the independent monetary authority whose primary objective is to maintain price
stability (see Annex 1). Moreover, the Banco de España has, among other functions,
regulatory and supervisory responsibilities for the banking sector (the ECB has also
assumed these responsibilities in respect of significant institutions). It is also responsible for
the stability of the financial system as a whole, the preventive resolution of financial
institutions (in the framework of the European Single Resolution Mechanism), the protection
of bank customers, the supervision of payment services providers and the correct operation
of payment systems and market infrastructures. Further, it advises the Government,
produces reports and studies and compiles and publishes statistics relating to its functions.
The National Securities Market Commission (CNMV) is the independent agency entrusted
with the oversight and inspection of Spanish securities markets and the activity of all
securities market players. Other areas of the economy are also habitually covered by
independent agencies. Cases in point, to name a few, are the defence of competition and
the regulation of specific industries, such as energy and telecommunications (under the
responsibility of the National Markets and Competition Commission - CNMC - in Spain),
the auditing of public sector accounts and economic management (carried out by the
Spanish Court of Auditors) and, a more recent development, effective compliance by the
general government sector with the principle of budgetary stability (the preserve of the
Independent Authority for Fiscal Responsibility, AIRef).
As I stated, the ultimate aim of assigning these functions to independent agencies is to
obtain an institutional design that ensures a greater level of collective well-being. In this
respect, allow me to begin by recalling the main reason why the control of inflation was
assigned to independent monetary authorities in a large number of economies. The
argument is what the economic literature calls "time inconsistency", which highlights the
role of expectations in agents' behaviour. I believe price stability unquestionably enhances
economic growth and improves well-being in the long run. However, if the monetary
authority is not independent and, having regard to other more short-term goals, uses
monetary policy to stimulate demand repeatedly and above what would be consistent with
its inflation objective, an inflationary bias is generated. In the short run higher levels of
economic activity and employment can be attained, but the costs emerge later. The
inflationary bias is ultimately anticipated and incorporated into agents' expectations and,
therefore, into price-setting and wage bargaining. The outcome is higher inflation without
lasting improvements in the economy's level of output and employment. This detracts from
monetary policy efficiency and the commitments to price stability cease to be credible.
Taking the long view that price stability requires is more difficult for political authorities,
which may be naturally inclined to give priority to shorter-term considerations. Moreover,
and more generally, changes in government usually entail changes to political goals and,
frequently, the replacement of previous commitments with new ones. That is difficult to
square with the objective of credibility that private agents demand when they take their
decisions with medium and long-term results. Also, the eminently technical nature of the
functions of central banks likewise warrants this status.
All these arguments could be extended to economic regulatory and supervisory
agencies other than the monetary authority. Indeed, independence is one of the
principles envisaged in "Best Practice Principles on the Governance of Regulators", a
document released by the Organisation for Economic Co-Operation and Development
(OECD), to avoid undue influence and maintain confidence. The operational independence
of banking supervisors vis-à-vis governments and the interests of the sector being
supervised is also part of the "Core Principles for Effective Banking Supervision" set out by
the Basel Committee on Banking Supervision.2 In this respect, the empirical evidence shows
that independent authorities and supervisors provide greater legal security and
effectiveness in the fulfilment of their mandates than other, alternative institutional
arrangements.
True, independence is for a specific reason in those agencies entrusted with advising,
monitoring or evaluating public policies, whether of a budgetary or other nature.
Institutional independence is the best means of ensuring that evaluations are made in
accordance with objective and technical criteria, removed from the political opinions and
interests of those who are being evaluated.
I also wish to emphasise the value of independence when it comes to the compilation and
publication of statistics and analytical studies by economic supervisors as part of their
mandate. For these functions, experts need to adhere to technical judgement, free from
interference and conflicts of interest, as their work is essential for the monitoring by
national authorities, international organisations and the public at large of the general
economic situation and specific sectors. Independence in the field of statistical and
economic analysis means that institutions must work in a demanding environment where
data quality, statistical reliability and analytical rigour are essential. And all the more so when
the messages conveyed or recommendations made entail short-term costs in exchange for
long-term beneficial objectives.
2 The configuration of an independent agency: the case of the Banco de España
If the independence of an agency that assumes functions in the general interest is to be
effective, such independence must be formally acknowledged in the regulatory sphere.
It is worth distinguishing here between institutional, legal, functional and financial
independence and the personal independence of an agency's senior officials.
The regulatory reference to the Banco de España as an independent agency is set in
the 1994 Law of Autonomy, in the Treaty on the Functioning of the European Union
(EU), in the Statutes of the European System of Central Banks and in the Single
Supervisory Mechanism (SSM) Regulation. This independence is no mere legal
expression since, as I shall now stress, it is accompanied by several elements that enable it
to be effectively exercised.
First, the Banco de España has institutional independence in that the regulations ensure
the capacity of its governing bodies to act autonomously, without hierarchical subordination
to any higher authority. Indeed, as provided for under its Law of Autonomy, in exercising the
functions derived from its membership of the European System of Central Banks, the
Government may not give instructions to the Banco de España, and the latter may not seek
or take them.3
These principles are also applicable to the functions exercised as a banking supervisor
within the SSM. Given the dual role of the Banco de España as a national central bank of
the Eurosystem and a supervisory authority of the SSM, its independence takes on an extra
dimension regarding the necessary guarantee as to the performance of both functions
autonomously (which does not mean separately) within a single institution.
In this respect, it should be stressed that the governance of the Banco de España is
underpinned by an orderly distribution of different powers among the bodies that the Law
of Autonomy specifies as the governing bodies of our institution: Governor, Deputy
Governor, Governing Council and Executive Commission. Thus, the functions assigned to
the Banco de España by law are performed in a balanced way by these bodies, in
accordance with the powers set out in Annex 2. These arrangements are based on the
presence in these collegiate bodies of a significant percentage of independent Council
members (by way of example, six out of ten of the Council members with voting rights on
the Governing Council) appointed on the basis of their competence, knowledge and
experience in the field of economics, the financial system or law.
Legal independence is represented in the institution's own legal personality, which is
different from that any other State or General Government agency may have. As a result of
this personality, the Banco de España has the autonomy to assume contractual rights and
obligations with third parties and to take decisions under its remit, which are legally binding
for those concerned.
Functional independence means that, under the principles of observance of the law and
the general interest that govern its conduct, the Banco de España has the instruments
needed to perform its function and the autonomy to decide on the internal resources and
processes it deploys to fulfil the objectives assigned to it. This autonomy extends to its
internal organisation (divisions, departments and posts, with their tasks and procedures).
As an exception, a matter to which I shall return, there is currently the possibility of
government review of some of its decisions in the supervisory sphere.
Personal independence means that senior management, the Council members and
employees of the Banco de España can do their work "independently" in the exercise of the
functions entrusted to the institution. Here, independence means that in the decisions taken
and in the attendant actions, members of the institution must be free from external
interference and be guided exclusively by rigour and professional competence.
In practice, the personal independence of the institution's senior officials is sought through
the arrangements in respect of appointment, exercise of mandate and stand-down from the
post set in place, as a general rule, beforehand.
The independence of the Banco de España's senior management in relation to the political
authorities and to influence from the sector supervised is reinforced, inter alia, by: i) a
specific selection procedure for the posts of Governor, Deputy Governor and Council
members, with the Governor's appointment being made at the proposal of the Prime
Minister, from among persons with recognised competence in monetary or banking matters
and a prior appearance by the Minister for the Economy being required before the
competent Parliamentary Committee to report on the candidate;4 ii) the terms of office of
the Governor and the Deputy Governor are for six years (exceeding the electoral cycle)
and are non-renewable; iii) the setting of specified causes for dismissal from the posts
of Governor, Deputy Governor and elected Council members;5 iv) the incompatibilities
rules to which the Governor, the Deputy Governor and the Council members are subject; v)
the specific conflict of interest rules applicable during their terms of office that include
restrictions on financial transactions and private investments; and vi) prohibition of pursuit
of professional activity relating to credit institutions or to securities markets in the two
years following stand-down from the post (see Annex 3).
As regards the staffing of the institution, the Banco de España, by legal imperative, recruits
its employees observing the principles of equality, merit, ability and openness. These
principles prevail throughout their career within the institution. Job security for Banco de
España employees rests on the protection afforded by labour market legislation,
strengthened by various in-house policies (e.g. regarding leave of absence or the
establishment or extension of periods of leave).
Lastly, financial independence means that an independent institution has sufficient
financial resources to equip itself with material and human resources for the pursuit of its
mission. In this respect, the Banco de España has sufficient financial capacity as a result of
the revenue sources legally and statutorily assigned to it, and it is able to draw on such
revenue to cover its functioning costs. The difference between each year's revenue and
costs is made over to the Public Treasury, bolstering State revenues. Accordingly, the
Banco de España uses the resources available to it observing the principles of efficiency
and effectiveness that should govern the use of all public funds.
I believe the Banco de España's legal framework and experience as a financially and
organisationally independent institution can be a good benchmark for any future
redesign of other economic supervisors in Spain which, in some cases, enjoy less
autonomy.
3 Formal independence: a necessary but insufficient condition
Although independence must be based on a sound legal framework, formal
"independence" is a necessary but insufficient condition for independent agencies.
Independence must be effective and, therefore, it must be credible. In other words, an
"independent" agency must be recognised by society as one that operates independently
within its area of competence. This requires there to be complete trust that its actions are
governed exclusively by true and fair compliance with the mandate entrusted to it, because
this is the best way in which to serve the general interest. In consequence, connecting
channels with society must be maintained and reinforced. This should result in a pro-active
exercise in institutional transparency and accountability in the fulfilment of our
mandate, as I shall detail later.
Moreover, nor can we forget that an independent agency's efficiency is not impervious
to its surroundings. Accordingly, to preserve the independence and prevent overload of
these institutions, it must be recognised that their performance also depends on actions
taken in other economic policy areas.6 Monetary policy is an evident example of this,
especially in a monetary union such as ours in which the single monetary policy coexists
with each country's own macroeconomic policies. Indeed, the governance of Economic
and Monetary Union recognises the need for the single monetary policy to be
accompanied by fiscal and structural policies consistent with economic stability. With
this goal in mind, a wide range of coordination and supervision mechanisms have been put
in place, such as the Stability and Growth Pact (SGP) and the Macroeconomic Imbalance
Procedure. Such considerations are also applicable to other areas of activity of independent
institutions, such as financial stability and banking supervision in the case of the Banco de
España.
Indeed, these considerations justify central banks' frequent calls for an appropriate
economic policy mix. And it is in this framework of assurance of economic stability that
citizens and politicians should place declarations by the independent monetary authority on
economic policy conduct in general. In this respect, as I indicated earlier, the functions of
the Banco de España include advising the Government and producing reports and studies.
The present crisis provides us with a good example. The robust monetary policy actions of
the ECB, necessary as they were, would have been insufficient had it acted alone. The
various fiscal expansion measures taken by national governments and, fortunately on this
occasion, also by the European Union overall, have been decisive and have supplemented
those adopted by the monetary authority. Similarly, post-crisis, monetary policy efficiency
and the necessary macroeconomic stability will require that fiscal authorities apply budget
policies that ensure that public finances are sound. This means that once the recovery is
firmly entrenched, fiscal consolidation policies will have to be resumed in accordance with
the SGP rules.
4 Possible ways to strengthen and enhance the Banco de España's independence
Now I wish to concentrate on a number of possible ways to enhance our independence.
These may ultimately also be applicable, in some cases, to other economic supervisors.
I will start by referring to the personal independence of the institution's senior officials. Our
current system, whereby it is the Prime Minister who appoints the Governor, is a practice
followed in a very high proportion of countries.7
In our case, however, I believe it would be appropriate to grant Parliament a bigger role
in the appointment of the Governor, the Deputy Governor and the elected members of
the Governing Council, provided in all cases that the process is rapid and that posts are
not left vacant. Parliament's role could be instrumented through appearances in
Parliament prior to the appointment, or through confirmation of the appointment or of
the suitability and technical and professional sufficiency of the proposed candidates.
Involving Parliament in the appointment process would, in my view, raise the public's
perception of the independence and legitimacy of the senior officials. This would have
a positive impact on the prestige of our institution, on the trust we inspire in society and on
the performance of our functions. In addition, making the Banco de España's senior
management selection process more visible should contribute to fulfilling the legal
requirements whereby the Governor and the Deputy Governor must have "recognised
competence in monetary or banking matters" and the Council Members "recognised
competence in economics or law".
Participation of the legislature in the Banco de España's senior management selection
processes would be consistent with the procedures followed by the European Parliament
to appoint the ECB's senior management, with the opinion of the Parliament now being
binding in the case of the Chair and Vice-Chair of the Supervisory Board. In addition,
although it is not the predominant model in the main European countries, the parliaments of
some countries, such as Finland, Slovakia, Latvia and Lithuania, play an important role in
the appointment of their central bank governors. Beyond Europe, in the United States the
appointment of the Chair of the Federal Reserve has to be confirmed by the Senate.
Although not usual practice, some countries have also introduced certain transparency
standards in the procedure for pre-selecting candidates. The Bank of England is one of the
most striking examples, as there is an open pre-selection process for appointment of the
Governor and Deputy Governors. In addition, the UK Commissioner for Public
Appointments, who is responsible for reviewing the appointments of senior officials of more
than 300 public agencies, approves the other appointments on the central bank's Court of
Directors.
I believe it would also be desirable to unify to some extent procedures for appointment
of the senior officials of the various independent agencies existing in Spain. These
procedures are currently highly disparate.
The possible introduction of improvements in the appointment of institutions' senior officials
could also be accompanied by a reflection on their terms of office. Terms that extend
beyond the electoral cycle are crucial to reinforcing the independence of individuals
and, ultimately, of the institutions themselves. A long term of office may also be
advantageous from the standpoint of accumulation of experience, and may determine the
capacity of influence in the different international fora in which the senior officials of
supervisory bodies take part. In this respect, the term of office of the Governor (and of the
Deputy Governor and Council Members) of the Banco de España - currently six years,
nonrenewable in the case of the Governor and the Deputy Governor - although longer than a
Parliamentary term, is relatively short by international standards (see Annex 4).8 A good
benchmark for the future could be the term of office of the members of the ECB's
Executive Board which is set at eight years and is non-renewable (as is the case at the
Bank of England).
The explicit prohibition of renewable terms of office is, in my opinion, a key element
that should be preserved. While few of our central bank peers share this characteristic,
non-renewable terms of office are warranted because they nullify the incentives for the
incumbents in the highest positions of authority at those institutions to ingratiate themselves
with those who decide on their possible re-election. In the case of the Banco de España, as
I have mentioned already, the Governor and the Deputy Governor have non-renewable
terms, but the members of the Governing Council do not, since their term is renewable
once. Non-renewable terms could therefore also be considered for members of the
Governing Council.
Indeed, I believe that it would make sense to seek to standardise the criteria for terms
of office and their non-renewability across the various independent bodies in Spain.
I wish now to focus on another aspect I consider relevant to strengthening the independence
of the Banco de España and, in particular, its supervisory function. As I have just stated,
the Banco de España has decision-making capacity over the performance of its functions.
However, non-monetary policy acts and decisions (such as those concerning the imposition
of supervisory sanctions) may, under the Law of Autonomy of the Banco de España,9 be
subject to government review via the lodging of an administrative appeal at the Ministry of
Economic Affairs and Digital Transformation. This ministry may thus review - and
potentially annul -decisions made by the Banco de España.10 To avoid this possible
government interference, it should be established that supervisory decisions by the
Banco de España bring administrative proceedings to an end or, in other words, that
administrative appeals against its decisions may not be lodged at the Ministry of Economic
Affairs and Digital Transformation. Of course, such decisions could still be contested in the
courts. This change would equate the Banco de España's supervisory decisions, which
generally refer to less significant institutions, with those of the ECB in relation to significant
institutions.
In tandem with greater Banco de España independence in the supervisory realm, it could
be useful to strengthen the governance of decision-making in this arena. In this connection,
the Governing Council of the Banco de España currently comprises, aside from the
Deputy Governor and myself, six elected members and two ex officio members. The latter
sit on the council by virtue of their position, namely: the Vice-Chair of the CNMV and the
General Secretary of the Treasury and International Financing.11 It has traditionally been
argued that the ex officio members allow for enhanced coordination across the country's
various economic and financial authorities. However, such coordination was boosted
recently via the creation in 2019 of AMCESFI, the new macroprudential authority, in which
the three sectoral supervisors and the Ministry of Economic Affairs and Digital
Transformation participate. Against this background, and in the interest of increasing the
institution's independence, it might be desirable for the ex officio members to attend
the meetings of the Governing Council of the Banco de España in a non-voting
capacity, and for the Banco de España representative at the CNMV to do likewise.
5 Financial supervision arrangements in Spain
I would also like to underscore that, precisely after redressing a significant shortcoming
detected in the Spanish financial supervisory system by creating a Spanish macroprudential
authority, I believe that it is now time to start reflecting deeply on the financial
supervisory model existing in Spain.12 This would serve to align it with international best
practices and adapt it to the challenges we currently face. The supervisory model is relevant
from many standpoints, since it may have a bearing on how efficiently and effectively the
goals pursued are attained and ought to resolve possible conflicts of interest across the
different areas supervised.
In this connection, it should be noted that, after the 2008 global financial crisis, some
countries have changed their supervisory models, broadly speaking, by adopting more
integrated models and increasing the role of central banks. Among these integrated models
I wish to highlight one structured around two separate bodies: a central bank,13 charged
with prudential supervision, i.e. the solvency of banks, securities firms and insurance
companies, and a second body to oversee all intermediaries' conduct and protect the
investors and customers of various financial products and services.
The principle of separating prudential supervision from the supervision of conduct,
with each of these two functions discharged for the entire financial system by separate
institutions, should, in my opinion, be a core part of the reflection on the improvements that
can be made to the financial supervisory model in Spain.
In my opinion, the responsibilities for preserving the financial soundness of all financial
institutions irrespective of their nature (banks, insurance companies and securities firms,
etc.) - including independent decision-making capacity over the use of macroprudential
tools - and for ensuring such institutions conduct themselves appropriately in their
relationships with their customers,14 should be separated and assigned to different
authorities (the Banco de España and the CNMV, respectively). This would, in my view, be
an optimal institutional framework for managing possible conflicts between these two
responsibilities and for making supervisory activity more efficient and effective, especially
against a backdrop of increasing interconnectedness between financial sector players, with
the emergence of increasing numbers of financial conglomerates. Moreover, there are
obvious synergies in the joint supervision of such conglomerates, using similar approaches,
methodologies and resources.
Having a single national macroprudential authority (the aforementioned AMCESFI) should
ensure the required close coordination between these authorities. Under this arrangement,
the AMCESFI's key objective is to facilitate that coordination.
Here we should also include the functions relating to the resolution of financial
institutions, which in Spain are separated into the preventive resolution authority (the Banco
de España) and the executive resolution authority (the FROB),15 within the framework of the
European Single Resolution Mechanism. This is a more complex arrangement than found in
other countries, where, with rare exceptions, the two resolution functions are united under
the same banking supervision authority (in Spain, the Banco de España). Combining the
two under the banking supervisor can be justified on the grounds of economies of
information and cost, and consistency vis-à-vis assessing the implications for financial
stability.
In any event, changes to financial supervision arrangements such as I have outlined should
come in parallel with the corresponding adjustments to the governance frameworks
of those institutions whose functions are amended.
6 Governance, transparency and accountability
As I have emphasised, in addition to independence, the independent authorities must have
the highest transparency and accountability standards, since these are vital for conferring
legitimacy upon them.
Accountability by independent bodies and authorities for their actions and activities should
preferably be before Parliament. This requirement is formally enshrined for the Banco de
España by two means. First, there is parliamentary control over the Banco de España's
budget, balance sheet and profit and loss account, which are submitted to Parliament
via the Government. The Banco de España also regularly submits reports to Parliament,
such as the Annual Report, the Institutional Report, the Report on Banking Supervision and
the Report on Sanctioning Measures.
Stipulated as part of this accountability before Parliament is the Governor's appearance
before the Economic Committee of the Congress of Deputies, to present the Annual
Report prepared by our institution. This report provides a detailed assessment of
developments in the Spanish economy and its main challenges. Likewise, the Governor of
the Banco de España is expected to regularly appear before the Parliamentary and Senate
Budget Committees to assess the content of the Draft State and Social Security Budget.
Complementing these regular appearances, there have been occasional testimonies before
various committees, such as the recent appearance before the Parliamentary Committee
for the Social and Economic Reconstruction of Spain after COVID-19.
In my opinion, this accountability mechanism should be reinforced with more regular
appearances by the Governor before Parliament. Specifically, it may be appropriate for
the Governor to appear periodically to present the Banco de España's view of the economic
situation, monetary policy and the financial system, and to report on the institution's actions
and plans within the various areas under its remit.
Institutional transparency is also a basic principle for the proper functioning of
independent public authorities, given that confidence in and the credibility of these