t t mboweni : central bank independence speech by mr t t mboweni, governor of the south african reserve bank, at the reuters forum lecture, held in johannesburg, on 11 october 2000. * * * “ independence signifies ignoring pressures, whatever its source. the independence of central banks goes,... beyond independence from political, executive and legislative power. for me it also equates with independence from private or collective economic interests, autonomy versus the short term, frequently imposed by capital markets and, finally, freedom of action vis - a - vis the monetary policy of other central banks. ” prime minister lionel jospin. paris, may 2000. 1. introduction i am extremely pleased at this invitation to present this inaugural address in the reuters forum lecture series. this is an important initiative and i wish you well for the sustained success of this lecture series. we have chosen to discuss the issue of central bank independence since the topic is both current and highly significant. incidentally when the banque de france organised their bicentennial celebrations in may this year, they chose the topic of central bank independence as the theme for the colloquium. at the said banque de france colloquium, the prime minister of the french republic, monsieur lionel jospin remarked that : “ the increased power and influence of central banks, the greater visibility of their role and their leaders, have inevitably focused attention on their role, their efficiency, the principles underlying their actions and, in some cases, their place in the democratic way of life. ” central banking is of cardinal importance in any country because of the legal right normally granted to central banks to create money. this money can serve as a means of payment, a unit of account and a store of value. one of the important issues immediately arising after granting this right to a central bank, is whether this function should fall under the ultimate control of the executive branch of government - the cabinet and its administrative departments - or whether parliament should leave this responsibility to be freely executed by an independent, autonomous powerful institution run by unelected people. 2. advantages of an independent central bank the traditional argument in favour of a strong, independent central bank is that the power to spend money should in some way be separated from the power to create money. numerous episodes in the world ’ s economic history testify to a government ’ s potential abuse of its power to create money. around the third century ad in the roman empire, for instance, the silver

share of securities issued in other euro area countries and held by monetary financial institutions has strongly increased in the last ten years. by contrast, retail banking markets have remained fragmented. second, the growing prominence of eu banking groups with significant cross - border activities. eu banks with significant cross - border activity hold a sizeable and rising share of total eu banking assets. although the number of eu banking groups with significant crossborder activities increased only slightly between 2001 and 2005, their consolidated assets grew by 54 % and their share in the overall consolidated eu banking assets increased from around 54 % to 68 %. third, the high pace of financial innovation which resulted in the rapid growth of new types of financial instruments for transferring risk and of structured credit markets. in turn, this fostered the activities of non - bank intermediaries, many of which are highly leveraged and, mostly, non - regulated. these developments have facilitated the transfer and redistribution of risks across the financial system, thus increasing its efficiency and potentially its resilience to shocks. at the same time, as recent events have shown, the growing complexity of financial instruments and the opacity of exposures of financial institutions can give rise to increased uncertainty regarding the degree of risk involved, the ultimate bearer of the risk, and the extent of potential losses. as we presently see in periods of turbulence, this complexity and opacity may prompt a further propagation of initial shocks and a more generalised contagion. 3. enhancing the eu financial stability arrangements the structural developments in the european financial system, which i have just outlined, entail challenges to the eu financial stability framework. in a nutshell, given the increasing interlinkages between markets, market infrastructures and institutions in the eu financial system, potential disturbances have eu - wide effects. therefore, the eu financial stability framework should be able to detect effectively risks to the stability of the eu financial system as a whole and to handle efficiently any crisis with a cross - border dimension. as you are well aware, there are a number of policy initiatives at the eu level, both predating and following the financial market turbulence, in order to refine and reinforce over the medium - term the ability of existing arrangements to cope with such challenges. these initiatives include the strengthening of the financial crisis management arrangements, in line with the strategic roadmap adopted by the ecofin in october last year, and the enhancement of the lamfalussy framework for regulation and supervision, as agreed by the ecofin council