Boards set the tone for their institutions' risk taking activities, and provide effective oversight to ensure that their decisions are followed. Of paramount importance is the need for boards to ensure that risks are estimated in a consistent and timely manner, and escalated to the board with attention being focussed on the management of the emerging risks. Today, boards face additional challenges of discharging these responsibilities in an environment that is rapidly changing and highly competitive. Achieving effective boards and strengthening the foundations of sound corporate governance have therefore become a priority in the reform agenda for many countries in the recent period. The implementation of Basel II, new financial reporting standards and principles-based regulatory approaches have also significantly increased the importance of, and reliance on sound judgement, integrity and competence by the board and senior management. This, in turn has been a key driver in galvanising efforts to strengthen market discipline as a countervailing influence that will rein in high risk behaviour by banking institutions. Achieving a framework with the right mix of regulatory and market-based incentives, however, continues to remain a significant challenge. Transitioning to market-based discipline can be particularly challenging in emerging markets where regulation has tended to be more prescriptive. In these markets, safety nets are also more prevalent and the tolerance for institutional failures is lower given its far reaching implications on consumer confidence. For the most part, the liabilities of banks are not traded in the market, so debtholders generally lack the opportunity to exercise market discipline.

– https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp191112_1~f304b47e14.en.html  3/9  Mechanism (SSM) in 2014, the Banco de España’s supervisory role was integrated into a new institutional framework with the European Central Bank at its core. I will come back to this function later on. Some lessons on central bank independence Let me share with you some reflections about central bank independence nowadays. This will be in the form of five lessons which, in my view, should be kept in mind when thinking about central bank independence, particularly at the current juncture of seemingly tamed inflation but with difficulties in achieving price stability objectives in some advanced economies. 1. Institutional settings matter First, I would state that independence, to be effective, must rest on a robust legal and institutional framework. Independence must be formally recognised in all of its relevant dimensions: namely, at the institutional, functional, personal and financial levels. This is the case in the euro area, where the Maastricht Treaty4 provided the appropriate framework; but unfortunately it is not the case in other regions, thus making the task of central banks much more complicated. 2. The need to deliver Second, the main reason for central bank independence is a utilitarian one: independence is an instrument to enhance effectiveness in order to achieve agreed objectives in the general interest, such as price or financial stability. The social value of central bank independence is thus inextricably linked to the effectiveness of its policies.