that they represent possible actions even in cases where the boundaries of interest rate policy have been reached : if interest rates are near the lower zero bound, or if the stimulus from interest rate cuts is not transmitted to the real economy. to avoid any misunderstanding : this does not mean that central banks have no role to play in financial stability. the necessary separation pertains to the policies, not to the institution. but it does mean, for example, that the decision - making body responsible for monetary policy should not be in charge of supervising banks as well. in europe, under current plans ultimate responsibility for the new european banking supervision mechanism will rest with the ecb governing council. to avoid possible conflicts of interest, this should not become a permanent solution. a change of the european treaties is required to allow for a body within the ecb other than the governing council to have the final say in supervisory matters. if this avenue is not taken, an independent supervisory institution will become necessary, in my view. when it comes to monetary and fiscal policy, however, the separation should go a little further, even. mervyn king once quipped that “ central banks are often accused of being obsessed with inflation. this is untrue. if they are obsessed with anything, it is with fiscal policy. ” let us delve a bit into the origins of this obsession. public debt and inflation are related on account of monetary policy ’ s power to accommodate high levels of public debt. thus, the higher public debt becomes, the greater the pressure that might be applied to monetary policy to respond accordingly. suddenly it might be fiscal policy that calls the shots – monetary policy no longer follows the objective of price stability but rather the concerns of fiscal policy. a state of fiscal dominance has been reached. technically, fiscal dominance refers to a regime where monetary policy ensures the solvency of the government. practically, this could take the form of central banks buying government debt or keeping interest rates low for a longer period of time than it would be necessary to ensure price stability. then, traditional roles are reversed : monetary policy stabilises real government debt while inflation is determined by the needs of fiscal policy. for monetary policy to deliver price stability, it is ultimately dependent on sustainable fiscal policy. this is why acting as a lender of last resort for governments can prove a slippery slope. if governments can expect to be bailed out by central banks, chances are that they will adjust their behaviour accordingly. and in the euro area, a

sunil mendis : central bank governance and how such governance is related to strategic planning in central banks opening remarks by mr sunil mendis, governor of the central bank of sri lanka, at the 3rd seacen exco seminar and meeting, colombo, 28 - 29 january 2005. * * * deputy governors and heads of delegations of seacen member and observer countries, mr gavin bingham, head of international liaison of bis, dr subarjo joyosumarto, executive director of the seacen centre, distinguished invitees, ladies and gentlemen. it gives me great pleasure to inaugurate the 3rd seacen exco meeting and special seminar to mark the meeting. as a founder member of seacen, the central bank of sri lanka is honoured and delighted to host these two events in colombo, sri lanka. on behalf of the central bank of sri lanka, i extend a warm welcome to all the delegates from the seacen member and observer countries, our special guests, and of course, the officials of the seacen centre. the gathering of several distinguished central bankers today demonstrates the emphasis and importance placed by them on the need for co - operating with each other to resolve issues of mutual interest. we host these two events just a month after the deadly ‘ tsunami ’ hit some of our countries causing unprecedented and unimaginable destructions to the life and property. we are still recovering from this severe blow. tsunami, indeed, brought all of us even closer. our thoughts and prayers are with those who lost their beloved ones, property and suffered injuries. as monetary authorities in these countries, we have greater challenges before us in rebuilding our nations. i hope we could effectively face these challenges with active cooperation of all central banks in the region. we live in an era of rapid globalisation. enriched by vast advances in information and communication technology, the process has facilitated the free flow of trade and investments across the borders. this has also posed burgeoning management challenges to central banks in the form of how to plan for the future in a scenario of multiples of objectives and targets entrusted to them. in order to overcome these challenges, the central banks world over, are called upon to review their objectives and restructure their activities. such review processes encompass re - examining legal frameworks, accounting practices and policies, organisational structures including the change in the composition of boards, supervisory and human resources standards, to mention but a few of the new tasks. having realised this need, the