stephen s poloz : central bank of the year award remarks by mr stephen s poloz, governor of the bank of canada, at the central banking awards 2018, london, 1 march 2018. * * * it is an honour for me to accept the award for central bank of the year on behalf of the staff of the bank of canada. and it is a real pleasure to be here to celebrate the successes and achievements of central bankers from around the globe, such as my good friend lesetja kganyago of south africa. back in january, when central banking announced this award, you published an extensive writeup that detailed the reasons why we were judged to be worthy of it. i am very glad that you did so, because the article illustrates just how important teamwork is at the bank of canada. in that article, every employee in every department can see how their own work contributes to a central bank that is operating at the top of its game. from the model developers, to the currency designers, to the people who got us settled back in our renewed headquarters — everyone contributed to an outstanding body of work with remarkable skill and dedication. so, this award belongs to all the members of our incredible team. i would like to particularly thank central banking for recognizing the work we have done in terms of conducting monetary policy in an era of heightened uncertainty. we have been working on the theme of uncertainty since the global financial crisis revealed the limits of our models and our knowledge. and we have learned that it is far better to be open and honest about the uncertainty we face, as well as how we deal with it, rather than to just assume the uncertainty away and project a false sense of confidence. because profound uncertainties are everywhere, we began talking about monetary policy as an exercise in risk management, as opposed to the precision engineering that many believe the practice of monetary policy to be. to be truly honest about the uncertainties we face, we stopped providing routine forward guidance, which observers and market participants had come to rely on. we took some grief for this decision. but i am certain that the best and most honest approach is to communicate openly about the bank ’ s reaction function, and the key risks we see. this leaves market participants to interpret the data and make their own forecasts about the future path of interest rates. it has taken time, but markets and observers are increasingly adapting to our approach. this experience shows that open communications are vitally important — even more so in a world

of a banking union with the agreement on the establishment of a single supervisory mechanism, with the involvement of the ecb. the reference to the ecb and the statement that the commission will “ bring forward proposals under article 127 ( 6 ) of the treaty ” mean that there is a direct link to emu. as it is well known, article 127 ( 6 ) provides that the council by unanimous vote may “ confer specific tasks upon the european central bank concerning policies relating to the prudential supervision of credit institutions. ” accordingly, the single supervision will refer mainly to the euro area as the ecb can only have binding powers in relation to the 17 members that have adopted the euro. the focus on emu is appropriate for several reasons, which i will elaborate in my remarks. however, this does not exclude possible mechanisms for other eu countries to be involved in the single supervisory mechanism, if so foreseen in the council regulation activating article 127. 6 of the treaty. this could facilitate further financial integration in the single market as a whole. bis central bankers ’ speeches the statement of the june euro area summit also makes clear that the single supervisory mechanism is directly related to the decision to grant the possibility of direct recapitalization of banks by the european stability mechanism. this new and important step in the effort to de - link the vulnerabilities of sovereigns from euro area banks implies an allocation of supervisory functions to the european level. therefore, european recapitalization creates an immediate need for european banking supervision. later in this talk, i will argue why i think that there are very good reasons for the involvement of central banks in the supervision of banks. it is essential that both of these elements – recapitalization and supervision on the european level - are implemented as expediently as possible. 2. why the single monetary policy needs a banking union the decisions taken at the june euro area summit are part of the long term reflections on the future of the monetary union, which are addressed by president van rompuy report. they are also clearly motivated by the challenges that we face in addressing the ongoing crisis. the recognition of the negative effects of the feedback loop between banks and sovereigns led to the decision to admit direct european bank recapitalization by the esm. this, in turn, motivated the decision to create a single supervisory mechanism. the deeper rationale is however the need to construct a banking union for ensuring a successful and well - functioning monetary union