Emsley Tromp: Central bank cooperation - the experiences of emerging
and developing economies
Address by Dr Emsley Tromp, President of the Central Bank of Curaçao and Sint Maarten, at
CEMLA's 60th Anniversary Commemorative Conference "Central Bank cooperation at the
beginning of the 21st century", Mexico City, 19 July 2012.
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Good afternoon ladies and gentlemen,
First, allow me to congratulate CEMLA on its 60th anniversary. For the past 60 years,
CEMLA has consistently promoted better knowledge of financial and monetary topics in Latin
America and the Caribbean through cooperation among the region's central banks. This
cooperation has evolved according to the prevailing economic conditions, developments in
economic thinking, and political views. Against this background, I would like to discuss the
experiences of emerging and developing economies in the area of central bank cooperation.
Central banks have a long tradition of cooperation. Over time, the objective of cooperation
has shifted from monetary stability towards the more comprehensive issue of financial
stability, and, the intensity and forms of cooperation have changed. During the 1920s, central
bank cooperation was aimed primarily at sustaining the gold standard. In the 1960s, central
banks cooperated mainly to maintain the Bretton Woods system of fixed but adjustable
exchange rates. Because of the disappointing experiences with foreign exchange rate
interventions in the 1970s, central banks became more inclined to preserve monetary
stability through domestic monetary policy actions than through international policy
coordination. As financial markets became more integrated because of technological
developments and financial innovations, in the 1980s and 1990s central banks cooperated
largely on development and introduction of international standards for prudential regulation
and coordinated financial sector supervision. During the international financial crisis that
started in 2007, central banks coordinated their efforts to fight systemic liquidity risks and,
through monetary policy coordination, attempted to reduce the risk of deflation and prevent a
deep global recession.
Cooperation among central banks is important both at a global and regional basis.
Cooperation is encouraged at a global level and carried out at a regional level to account for
regional differences. In the case of emerging and developing economies, cooperation among
central banks follows by and large policies agreed upon by multilateral institutions. The Bank
of International Settlements is of course the best example of a global organization for
discussion, consultation, and cooperation among central banks. Meanwhile, CEMLA
promotes cooperation between central banks on a regional level. In fact, as mentioned by
Javier Guzman this morning, CEMLA has played a key role in the promotion of regional
coordination through a global perspective. Hence, CEMLA has become a global regional
player.
Over time, the number of central bank organizations in our region has increased and
includes organizations such as the Central American Monetary Council (CMCA), the Fondo
Latinoamericano de Reservas (FLAR), and the Caribbean Centre for Money and Finance.
The main reason perhaps, for the increasing number of regional organizations is that certain
exchange rate and financial stability issues are regional in nature and directly impact a
particular region. Such issues can be best addressed regionally. Also, some emerging and
developing economies have claimed that the global organizations are overwhelmingly
oriented towards the Western economies. However, the risks always exist that a proliferation
of regional organizations may result in fragmentation of our coordination and cooperation
efforts leading to less effective results.
Cooperation and coordination of central banking activities is very important for emerging and
developing economies. Central banks in industrialized economies usually have just one
responsibility, that is, conducting monetary policy with the single objective of maintaining
price stability. In contrast, central banks in emerging and developing countries usually have
several tasks in addition to monetary policy. These tasks include debt management, advising
the government, and financial sector regulation and supervision. As a consequence, these
central banks have to pursue several objectives in addition to exchange rate stability and
promotion of economic growth. At the same time, the resources of these central banks, in
particular financial and human resources, often are limited. Therefore, cooperation and
coordination with other central banks can be very beneficial for these institutions.
Central banks are willing to cooperate as long as they pursue common goals. This
cooperation can take several forms, the simplest of which is the exchange of information and
experiences. In the case of the emerging and developing economies, cooperation between
central banks in this area is crucial given their relatively limited human and financial
resources. First, central banks exchange data and forecasts, which enable them to compare
and discuss economic and financial conditions and trends.
In this context, the standardization of concepts and the availability of data are crucial.
Second, central banks share and discuss theories, empirical studies, and research. This
exchange will enhance their understanding of economic issues such as inflation targeting,
potential output, exchange rate behavior, the transmission mechanism, and equilibrium
interest rates. Also, central banks exchange information about their policy choices and
approaches, which can stimulate policy coordination between central banks.
CEMLA has played an important role in our region in the area of dissemination of information
and experiences among central banks. Over the years, the organization has organized
several seminars on statistical methodologies and theoretical approaches. In addition, the
CEMLA regularly publishes and distributes empirical studies by central bank researchers in
the region and organizes seminars and conferences to discuss the empirical findings.
A second area of cooperation between central banks is the provision of emergency
assistance in exceptional circumstances. Over time, central banks have supported each
other in situations such as liquidity crises in order to mitigate systemic liquidity risk. This
emergency assistance has included, among other things, coordinated foreign exchange
operations. In the past, several central banks in the emerging and developing economies
received emergency liquidity assistance. For example, during the debt crisis of 1982, the
US Federal Reserve offered the Bank of Mexico a $700 million swap agreement. During the
currency crisis of 1994, the Bank of Canada offered Mexico a shortterm swap of
US$ 1 billion. Furthermore, Brazil received financial support from the Bank of International
Settlements in 1998 in the context of an IMF stabilization program. During the recent
international financial crisis, a new form of cooperation emerged in the provision of
emergency assistance. Major central banks, including the US Federal Reserve and the
European Central Bank, opened up inter-central bank swap facilities and repurchase
agreements to provide central banks with emergency liquidity.
In my view, the third and most ambitious form of cooperation between central banks is
coordination of monetary and exchange rate policy. The rationale for policy coordination in
these two areas stems from the potential externalities that domestic policy in one country can
have on other countries i.e., the "beggar thy neighbor" policies. For example, monetary
tightening in one country to reduce inflation will lead to exchange rate appreciation and
hence may cause inflationary pressures in a trading partner of that country. As a result of
increased globalization, these spillover effects have become more apparent.
However, after the fall of the Bretton Woods system in 1971, the appetite for coordinated
monetary policy and exchange rate intervention declined. Central bankers had a common
belief that the best way to achieve monetary stability was through domestic policies. As a
result, central banks became less inclined to trade off their policy autonomy for global or
regional policy coordination in the areas of monetary and exchange rate policy.
However, the recent international financial crisis has resulted in an intensification of
monetary policy coordination. In October 2008, the US Federal Reserve together with the
Bank of Canada, the Bank of England, the European Central Bank, the Central Bank of
Sweden, and the Swiss National Bank announced a reduction of their policy interest rates to
counterbalance deflationary pressures and an economic slowdown in these countries. In my
opinion, this joint intervention signaled the return of monetary stability as an important
objective of central bank cooperation. Hence, today, central bank cooperation is aimed at
maintaining both monetary and financial stability.
Finally, financial sector regulation and supervision is a fourth area of cooperation between
central banks. While most industrialized countries have separate authorities in charge of
financial sector regulation and supervision, in most emerging and developing countries this
task is concentrated at the central bank. Hence, this area of cooperation is very relevant for
our region.
As I mentioned, because of technological advancements and financial innovations, the
financial markets have become more integrated across countries. To promote financial
stability, central banks have been cooperating in the area of financial supervision and
prudential regulation. Besides central banks, policymakers and other market players also
have been involved in these international efforts.
One example of successful cooperation among central banks in this area is the Basel
Committee on banking supervision. In addition, central banks participated in the Financial
Stability Forum. In our region as well, we have several central bank organizations aimed at
promoting financial stability.
Notwithstanding these efforts, the world economy experienced a major financial crisis in
2007. We are still experiencing the effects of this crisis. In an effort to prevent a collapse of
the global financial system, authorities, particularly in industrialized countries, took
unprecedented measures aimed at supporting demand and reducing uncertainty and
systemic risk in financial markets. Meanwhile, through multilateral cooperation and collective
policy actions among for examples the members of the G-20, the effects of this financial
crisis were mitigated. This multilateral cooperation and policy coordination has reshaped the
cooperation among central banks in emerging and developing countries.
Economists and policymakers worldwide agree that the weaknesses that led to this financial
crisis should be addressed. Financial regulation and supervision need to be strengthened to
prevent a similar crisis in the future. This will require a number of steps. (1) Regulation
should be broadened to include all activities that pose economy-wide risks. (2) Financial
regulation will have to focus on strengthening financial institutions' management of liquidity
and risks. (3) Conflicts of interest should be reduced by making bonuses more consistent
with long-term success than with short-term profits. (4) The transparency of the financial
system should be improved. In the area of financial supervision, the focus should be on
detecting developments in the financial sector that might lead to a systemic crisis.
An important lesson of the last international financial crisis is that international cooperation
and policy coordination are crucial to maintain financial stability. Hence, these issues are
currently being addressed on a global and regional level.
International and regional cooperation in this area is very important for the Central Bank of
Curacao and Sint Maarten to promote financial stability in our monetary union and to
strengthen our position as an international financial centre. Our Bank is currently a member
of several international and regional organizations aimed at promoting financial stability.
These include among others, the Association of Supervisors of Banks of the Americas
(ASBA), the Group of International Finance Centre Supervisors (GIFCS), the Caribbean
Group of Banking Supervisors (CGBS), the Offshore Group of Insurance Supervisors
(OGIS), the International Association of Insurance Supervisors (IAIS), the Council of
Securities Regulators of the Americas (COSRA), the Caribbean Group of Securities
Regulators (CGSR), and the Offshore Group of Collective Investment Schemes Supervisors
(OGCISS).
Colleges of supervisors are an important example of regional cooperation providing an
effective and efficient supervisory oversight on cross-border financial institutions. Therefore,
within the Dutch Kingdom, which comprises the Netherlands, Aruba, Curaçao, and Sint
Maarten, we also are increasing cooperation and coordination of our policy initiatives in the
areas of financial sector supervision and regulation. We have created a financial supervisory
structure in which each country within the Kingdom has its own supervisory institutions
complemented by a standard-setting body at the Kingdom level: the Committee of Kingdom
Supervisors.
This Committee consists of the presidents of the respective central banks and is charged
with preparing legislation in line with international best practices, the timely implementation of
rules and regulations, and monitoring compliance. Such a structure while regional,
guarantees compliance with international supervisory standards. In addition, it creates a level
playing field with uniform rules within the Kingdom and promotes credibility and
transparency.
In my opinion, a new economic order has emerged as a result of the international financial
crisis.
This new economic order has reshaped cooperation between central banks. First, the scope
of central bank cooperation has broadened and deepened. For the past 30 years, the main
focus of central bank cooperation was financial stability. Today, central bank cooperation is
aimed at both monetary and financial stability. Second, while industrialized countries were
the key players in global governance before the financial crisis, today, emerging economies
also are actively involved in the international decision-making process with regard to efforts
and interventions for monetary and financial stability. The emerging economies have gained
this position thanks to the many structural reforms they have introduced over the years. As a
result of these reforms, these countries remained a source of strength for the global
economy during the recent crisis.
In conclusion, during its 60 years of existence, CEMLA has witnessed several forms of
central bank cooperation. Today, the aim is to promote both monetary and financial stability.
Also emerging economies, including those in our region, are now playing a key role in the
governance of central bank cooperation. The 60th anniversary of CEMLA is an occasion for
not only celebrating but also reaffirming our commitment to close cooperation in order to
achieve monetary and financial stability, crucial for sustainable economic advancement of
our countries, the region, and the world in general.
I thank you for your attention.