Central banks require more accountability

The appointment of Italy’s new central bank governor has turned into a depressing power struggle. But for all the elements that make this a uniquely Italian affair, it also raises broader questions about how a country should balance independence and accountability in the event of a possible central bank failure.
Matteo Renzi, the former prime minister and leader of the Democratic Party, has launched an attack on Ignazio Visco, the current holder of the job, who appeared on course to serve a second term. Last week, his party passed a parliamentary motion asking for an appointment that could provide “new trust” in the institution after a string of banking troubles.
Renzi’s move was widely seen as an affront to the constitution and an attack on the bank’s independence. The appointment of the governor is decided by the president of the republic, the prime minister, and the Bank of Italy’s board of directors. Parliament has no formal role in it. Renzi may be also trying to deflect the blame for his mishandling of Italy’s banking crisis onto the supervisor.
Yet there is a very fine line between defending independence and ignoring accountability. The Bank of Italy presided over a major crisis, caused by the accumulation of hundreds of billions in nonperforming loans on the balance sheets of banks. Italian taxpayers had to step in and rescue Monte dei Paschi di Siena, one of Italy’s largest lenders. Thousands of retail investors put their money into shares and junior bonds of weak banks including Banca Popolare di Vicenza and Veneto Banca; when these banks failed, their lifetime savings were wiped out.
Visco has always insisted the Bank of Italy did nothing wrong. In his view, nonperforming loans were the inevitable byproduct of Italy’s economic crisis. The bank did not have the power to remove managers who acted imprudently or criminally. He argues that the new European rules on bail-in can create instability and may need to be changed.
There may be some elements of truth in this defense. The trouble is that Italy never had the opportunity to discuss openly the behavior of its central bank. Pier Carlo Padoan, the finance minister, has always stood by the governor even when he had to sign a multi-billion-euro check on behalf of the taxpayer. The Italian parliament has just launched an inquiry into the banking crisis, but with only a few months to go before a general election, this is unlikely to produce significant results. The bank has also refused to open an internal inquiry to investigate if anything went wrong.
This scenario presents a major dilemma for the defenders of central bank independence. There are excellent reasons to give central bankers the privilege of staying above the political fray: Technocrats must be able to increase interest rates or force banks to raise more capital even if in the short run these measures may be costly for growth. However, independence begets responsibility. And when there are doubts about the conduct of a central banker, it is only fair for politicians to hold him or her to account.
Renzi may well be acting opportunistically by attacking the Bank of Italy. He may also be creating a dangerous precedent by breaking with established convention. But the best way to preserve independence and prestige of a central bank is for it to be as transparent and open to criticism as it can be. This lesson holds true in Italy and beyond.

— Bloomberg