thomas jordan : central bank independence since the financial crisis - the swiss perspective summary of a speech by mr thomas jordan, chairman of the governing board of the swiss national bank, at the cfs presidential lectures, goethe university, frankfurt am main, 9 november 2017. * * * the complete speech can be found in german on the swiss national bank ’ s website ( www. snb. ch ). the financial crisis presented central banks with significant challenges. they resorted to unconventional monetary policy instruments and expanded their field of operations. as a result, central banks have faced growing criticism. in particular, the question has arisen as to whether their independence is still justified. the experience of the swiss national bank ( snb ) since the financial crisis has shown that independence continues to be sensible and necessary ; central banks can best fulfil their mandate of ensuring price stability and contributing to the stability of the financial system if they are protected from political pressure. central bank independence will only endure as long as politicians and the public are convinced of its benefits. to this end, central banks must fulfil their mandate to the best of their knowledge and ability, while retaining a sense of proportion and a long - term perspective when implementing measures. not every short - term deviation from an objective requires an activist response. moreover, central banks must be conscious of their limits and avoid an accumulation of tasks. for an independent central bank to be perceived as legitimate in a democracy, it must be granted a clear mandate against which its performance can be assessed. however, the environment in which central banks operate is highly complex, and conditions can change rapidly. for this reason, mandates usually only sketch out a framework for central banks ’ operations. this gives them much - needed flexibility in difficult situations. as a counterweight to its independence, a central bank has a duty to report on its actions, and the results. indeed, the snb has regularly provided detailed reports on matters relating to both monetary policy and financial stability. for example, it has explained the rationale behind deciding to discontinue the minimum exchange rate or introduce the negative interest rate, and how these measures have helped it to fulfil its mandate. as regards financial stability, the fact that macroprudential instruments often have powerful distribution effects speaks against handing over the entire responsibility for such instruments to the central bank. in contrast to monetary policy, these measures are sometimes targeted at specific sectors and groups, and thus also have fiscal implications. in switzerland, macropr

seen in this perspective, the growing complexity of financial regulation is in itself a source of concern. as andy noted, under basel i a bank could calculate its capital requirements with pen and paper. that is inconceivable with the current rules. since the establishment of basel ii, which allowed banks to compute their own capital requirements through internal models, the complexity and granularity of such models has exploded. model complexity and uncertainty, coupled with shortseries of data, make calibration difficult and robustness questionable. an issue the framers of basel ii did not, in my opinion, get quite right concerns incentives. they thought that using the banks ’ own models to compute capital requirements would align banks ’ and supervisors ’ incentives, and improve both the banks ’ risk management practices and the risk sensitivity of prudential requirements. such a mechanism does exist, but it is of the second order. the first - order incentive for bank model - builders is to save costly equity capital. it would be unfair to say that regulators at the time were blind to this fact ; they just thought that supervisory validation would easily fend off abuse. well, maybe, but not easily. the dark side of granularity and sophistication are complexity and opaqueness, which make validation a daunting task. despite all supervisory activity, in fact, the regulatory risk density of banks ’ assets came to vary wildly across banks. it was not always obvious that variation in risk density related to variation in actual risk. 13 plus a few minor islands. haldane ag, madouros v, the dog and the frisbee, jackson hole symposium, 2012. haldane ag, multi - polar regulation, international journal of central banking 11 ( 3 ), june 2015. italian irb banks have typically been in the high range of risk density. this depends partly on the fact that their business models are largely oriented to credit risk, which especially under basel ii was penalised vis - a - vis market risk in terms of risk weights ; and partly on the liberal use of output floors in the bank of italy ’ s supervisory practices, already under basel ii. the use of output floors, set at adequately high levels, has been recognized as a useful tool to address the variability in the capital requirements for credit risk. see, e. g., basel committee on banking supervision, reducing variation in credit risk - weighted assets – constraints on the use of internal model approaches, march 2016. as i