Securing Financial Independence in the Legal Basis of a Central Bank

Abstract

Together with institutional, functional and organizational independence, financial independence constitutes one of the cornerstones of central bank independence, the economic ratio of which has been demonstrated extensively in the literature. In broad terms financial independence may be defined as referring to the legal and practical arrangements identifying the finances of a central bank and the extent to which the bank is subject to outside influence in this regard. In the (legal) debate on central bank accountability, arguably arrangements relating to central bank finances have sometimes been treated in a rather step motherly fashion. Yet, with the wider debate on good governance structures having reached central banking, more attention is paid to such detailed arrangements. This contribution focuses on and aims at providing an overview on the impact on central bank independence of the legal arrangements relating to several aspects of central bank finances. While government access to central bank money undoubtedly has an impact on the financial position of the central bank, this contribution focuses on those elements, which are arguably more directly linked to the financial position of a central bank, including capitalization and recapitalization, the determination of the central bank budget and the arrangements on profit and loss distribution. In legal studies these arrangements have certainly received less attention. To this end a critical assessment of the role which the legal basis of a central bank plays in enhancing or undermining the financial position of a central bank vis-a-vis government and, thereafter. In this context, legal arrangements which do not only support the financial independence of a central bank but also enhance its accountability are observed. Where appropriate, references are included to legal arrangements in existing central bank systems so to provide for negative and positive examples.

Keywords: central bank, central bank independence, accountability, central bank accountability, finances, capital, central bank finances, central bank capital, central bank legal basis

JEL Classification: A10, E50, E60, K10, K20, L50, N10, N20