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3 What Is Not Mentioned?

3 What Is Not Mentioned?

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Defining “Central Banks”: Four Criteria


“monetary policy” that the central bank governor regularly makes public

announcements regarding the future path of interest rates. In the second

decade of the 21st century, the “markets” seem to be genuinely offended

if such “guidance” is not forthcoming. In the third decade of this century,

this attitude may have change again.

Secondly, the thorny question of bank supervision has not been mentioned as a criterion for being a “central bank”. The reason is that although

bank supervision has been entrusted to central banks in several countries,

it is difficult to argue that this should be a natural role for a central bank.

Central banks may very well be consulted on rules and regulations, but

someone else should be policing the adherence to such rules and regulations by individual institutions. To perform such policing against its

customers cannot be a criterion for being a “central bank”. The subject

will, however, be touched upon under the heading of the role of central

banks as banks for the banks. A central bank may lend to a commercial

bank against undoubted collateral, but it cannot be the task of a central

bank to evaluate the quality of the loan portfolio of a commercial bank,

its business model, or the structure of its liabilities.

A central bank, at least as much as any other bank, lives or fails by its

reputation. Banks fail from time to time, sometimes in droves. When

banks supervised by central banks fail—for whatever reason—the supervisor’s reputation takes a knock. Central banks should be too wise to take

that risk.9

Third, it will be noticed that nothing has been said about the responsibility for maintaining “financial stability”. The reason is that “financial stability” is the product of all the rest. If governments pursue sound

economic policies, and central banks do not go outside their jobs (as

described above), it will take major external shocks to disrupt “financial

stability”. Large banks may fail, and other banks may fail in droves, but

they may do so even if they have adhered strictly to rules and regulations.


Mervin King, the former governor of the Bank of England, was lucky that the Bank was no longer

responsible for bank supervision when the financial crisis emerged in the UK in 2007–08. In 1997,

that responsibility was transferred to another government body by the Tony Blair government. Still,

Mr. King could not escape criticism. Similarly, when an Italian bank failed, Mario Draghi, the

newly appointed president of the European Central Bank, came under fire, because the failure

occurred when he was president of the Banca d’Italia, which had the supervisory authority.


The Origins and Nature of Scandinavian Central Banking

There is not much central banks can do to prevent managers of commercial banks from taking unwise business decisions inside established rules

and regulations. It is unrealistic to expect central banks to scrutinize the

books of commercial banks more thoroughly than the respective auditors


Fourth, controlling “asset prices” has recently been added to the list of

miracles central banks are now expected to perform. The general public,

and hence the press and politicians, look to central banks to hopefully

prevent the emergence of bubbles (which they can’t), and thereafter the

bursting of bubbles (which they also can’t), and finally to clear up the

mess caused by burst bubbles (which they can to some extent do).

However, the notion that it should be a central bank responsibility to

control or just advise on the prices of shares, commodities, and property

belongs in a different world of a “planned economy” nature. It is difficult

to see why economists employed by central banks should be expected

to have better crystal balls than economists employed elsewhere. They

all have access to nearly the same statistical information and use almost

identical econometric models. Judging “sustainable” price levels for different assets, or judging the timing of turning points, has much in common with medieval alchemy. A “bubble” is not proved to be a bubble

until it bursts with a big bang.

If there is one lesson history should have taught commercial and central banks alike, it is that they should stay away from alchemy, i.e. efforts

to predict the future. Advertising the likely path of future central bank

actions has so far mostly demonstrated both the inability of central banks

to predict the future, and the inability to foresee the effect of their own

inaccurate predictions. Forward “guidance” by central banks seems to

have a dangerous similarity with alchemy. Predicting the future should

be left to certified alchemists.

Part II

Before the Deluge. The Very

Different Origins of Scandinavia’s

Central Banks, the Great War, and

the Four Criteria


Sveriges Riksbank, and the Four Criteria


The Origins. Stockholms Banco (1656)

and the Invention of Banknotes

3.1.1 The Political Scenario

From the 15th century until 1866, Sweden was governed by a combination of the king/government and the Ständerförsamling (representatives

of the “Four Estates”, i.e. the nobility, the burghers, the clergy, and the

farmers). For the history of “central banking” in Sweden, the year 1544

is of some relevance.

In 1544 King Gustav Vasa ensured a hereditary kingdom for his

descendants against a promise that the representatives from the Four

Estates would have a substantial influence on important matters of state,

including financial affairs.

During most of the next three and a half centuries, the Estates fought

fiercely with the crown/government over the control of government

expenditures and revenues.

© The Editor(s) (if applicable) and The Author(s) 2016

S.E. Andersen, The Origins and Nature of Scandinavian Central

Banking, Palgrave Macmillan Studies in Banking and Financial

Institutions, DOI 10.1007/978-3-319-39750-4_3


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