attenuated by macroprudential action. 4 indeed, preventing the build - up of systemic risk through the use of both microprudential and macroprudential regulation and supervision is among the tasks assigned to central banks. how deeply the central bank should be involved in such matters remains an open question, however. there are naturally pros and cons, but in speculating on the issue, in my view one crucial fact must be borne in mind : financial instability can impair the transmission of monetary policy and prevent the central bank from achieving its price stability objective. this risk materialized in the euro area with the sovereign debt crisis. there are other fundamental arguments for central banks being fully involved in banking regulation and supervision. first of all their lender - of - last - resort function : only supervisory powers can enable the central bank to determine correctly and promptly whether a bank is illiquid or insolvent, as the northern rock case in the uk made dramatically clear in 2007. 5 at the same time, putting more power in the hands of central banks is likely to increase the political pressure on them. and this is a serious challenge for these venerable institutions. influencing asset prices and credit flows throughout the financial system makes them the perfect target for both lobbies and governments – and, of course, the ideal culprit if things go wrong. it was argued in the past that an institution in charge of both monetary policy and banking supervision may be tempted to be softer in setting the monetary stance in order to avert a banking crisis. the global financial crisis has dispelled this argument. on the other hand, the historical experience of countries like italy, where monetary policy and banking supervision were concentrated in a single institution – the central bank – shows that the independence attributed to the two functions by law and by social norms tends to be mutually reinforcing when the two are put under the same roof. the monetary - policy independence of a central bank – enshrined in statute, confirmed in practice and strengthened by hard - earned reputation – can powerfully support the independence of independence and macroeconomic performance : some comparative evidence, ” journal of money, credit and banking, vol. 25, no. 2, may 1993, pp. 151 – 162. paolo angelini et al. “ monetary and macroprudential policies, ” banca d ’ italia working 5 papers, no. 801, march 2011. bis, central bank governance and financial stability, may 2011. bis

central bankers ’ speeches banking supervision, which is essential to its effectiveness according to international principles. 6 another challenge to central bank independence comes from the resolution of banks that are no longer viable. if the central bank is in charge of banking supervision it obviously cannot abstract from bank resolution. but more often than not resolving a bank implies the use of taxpayers ’ money, and a non - elected institution dealing with it may find itself in an uncomfortable position, unless proper institutional arrangements are in place. this is why the banking union in europe is not a threat to central bank independence. a well - designed banking union will break the perverse feedback loop between sovereigns and banks, not undermining but strengthening the independence of the ecb and the national supervisory authorities. the banking union must contain both ingredients : a single supervisory mechanism and a single resolution mechanism, flanked by a single deposit insurance scheme. the recent proposal by the european commission points precisely in that direction. 7 the banking union will be an important step towards the completion of fully integrated european union. challenges from unconventional monetary operations the global financial crisis prompted central banks in most of the advanced countries to adopt a wide range of unconventional monetary measures, ranging from purchases of public and private assets to currency swaps and much more. while these measures undoubtedly avoided the collapse of the financial system and a devastating depression, in the perception of public opinion there was, and there still is, a risk of undesirable side - effects. compared to standard monetary instruments, unconventional operations may have substantial fiscal and re - distributional effects. a technocratic institution engaging in such operations may be perceived as lacking in democratic legitimacy, and its independence may be challenged. in a democracy the constant support of public opinion is the ultimate safeguard for a central bank. on this, i would like to quote paul volcker : in concept and practice, an informed citizenry, acting through a constitutional process and its elected representatives, can and does assign certain of its sovereign powers to a duly constituted authority. the corollary of that provision is also relevant : that delegation of authority can be withdrawn. in other words, the exercise of important governmental powers is ultimately dependent on maintaining the consent of the body politic. 8 central banks must accordingly pay increasingly close attention to defining and explaining the objectives of their action. communication to the public and to political institutions is far more important today than in the past. another possible unintended consequence of unconventional monetary policies is fiscal dominance. it is sometimes argued that large -