Over the past decade, there has been a trend towards increasing the independence of central banks as a way of improving long-term economic performance. However, while a large volume of economic research has been done to define the relationship between central bank independence and economic performance, the results are ambiguous.
According to the
Banking Law, bank supervision comprises the following areas of activity and
responsibilities:
entry
of banks into
and exit from
the market and
bank business operations
(granting operating licenses, supervisory
measures, reporting, special
administration, liquidation and
bankruptcy of banks);
determining the accountability of the
bank's owner for the bank's operations (internal organization of a bank,
audit);
determining the methods for the bank's
risk management (determining the capital and capital adequacy of a bank, risk
management);
consolidated supervision of banks
(determining the scope and frequency of consolidation, as well as the content
of consolidated financial statements);
Consumer protection (determining a
uniform method for calculating and disclosing loan and deposit prices and other
elements of the loan contract and cash deposit contract);
protection of
the Croatian National
Bank employees involved
in bank supervision
(liability for damage);
Cooperation with other supervisory bodies in the country and abroad (data
processing and communication of
information).
Central bank
independence has defined a number of types of independence.
1. Legal independence
The independence of the
central bank is enshrined in law. This type of independence is limited in a democratic
state; in almost all cases the central bank is accountable at some level to
government officials, either through a government minister or directly to a
legislature. Even defining degrees of legal independence has proven to be a
challenge since legislation typically provides only a framework within which
the government and the central bank work out their relationship.
2. Goal independence
The central bank has
the right to set its own policy goals, whether inflation targeting, control of
the money supply, or maintaining a fixed exchange rate. While this type of independence is more
common, many central banks prefer to announce their policy goals in partnership
with the appropriate government departments.
This increases the transparency of the policy setting process and
thereby increases the credibility of the goals chosen by providing assurance
that they will not be changed without notice. In addition, the setting of
common goals by the central bank and the government helps to avoid situations
where monetary and fiscal policy are in conflict; a policy combination that is
clearly sub-optimal.
3. Operational independence
The central
bank has the independence to determine
the best way
of achieving its policy
goals, including the types of instruments used and the timing of their
use. This is the most common form of central bank independence. The granting of
independence to the Bank of England in 1997 was, in fact, the granting of
operational independence; the inflation target continued to be announced in the
Chancellor's annual budget speech to Parliament.
4. Management independence
The central bank has
the authority to run its own operations (appointing staff, setting budgets, and
so on.) without excessive involvement of the government. The other forms of independence are not
possible unless the central bank has a significant degree of management
independence. One of the most common
statistical indicators used in the literature as a proxy for central bank
independence is the "turn-over-rate” of central bank governors. If a government is in the habit of appointing
and replacing the governor frequently, it clearly has the capacity to
micro-manage the central bank through its choice of governors.