Joseph Doherty
From being little-known institutions with even less well-understood powers, central banks have come increasingly under the spotlight in recent years. The effects on economies of monetary policies aimed at reducing price inflation, the deregulation of national and international financial markets, and the plans for Economic and Monetary Union in Europe have brought them to the forefront of public attention. This article attempts, briefly, to discuss the role played by the Central Bank of Ireland in the economy and to outline, in broad terms, its development and the various functions it performs in the public interest. But first, a short discussion of why a country needs a central monetary authority.
Practically every country in the world, large or small, has established over the years a monetary institution - formally separate from government, and thus from the short-term political pressures to which the latter is subject - and has entrusted it with the management of the country's monetary system. While central banks have been in existence since the seventeenth century, modern central banking could be said to date from the time when the full backing of currencies by gold was abandoned in the early part of this century. Since then, the focus of central banks' monetary policies has been on achieving price stability, thereby creating the conditions for sustainable economic growth and prosperity. The primary objective of central banks is, therefore, the maintenance of the purchasing power of money. However, given the broad expertise and knowledge on banking and financial matters developed by central banks over the years, many governments have entrusted them with additional tasks in the monetary sphere. The most significant of these has been safeguarding the financial soundness of domestic banking systems, in the interest of depositors, through the assignment to central banks of regulatory and supervisory powers over (mainly deposit-taking) financial institutions.
A central bank's ability to pursue the objective of price stability through fighting inflation depends, crucially, on the degree of'independence' afforded it under law by governments and legislators. The need to give responsibility for monetary policy to an institution which is independent of government is recognised in most developed countries. Its importance is moreover underlined in the Maastricht Treaty, which requires the future European Central Bank and the national central banks to be independent of the European Union and its Member States. At the same time, there is also a perceived need for central banks, as public institutions, to become more accountable to the public and their elected representatives for their actions. In practice, accountability and independence are seen to be mutually reinforcing and necessary elements in a properly working monetary system.
The Central Bank of Ireland was established in 1943 following the passing by the Oireachtas of the Central Bank Act. 1942. It succeeded the Currency Commission, established in 1927, which was primarily a currency-issuing agency. The Act, which established the Currency Commission (the Currency Act. 1927), also fixed the relationship of the new Irish currency at parity with sterling, continuing the relationship with the British currency which had existed for over 100 years. The maintenance of this connection was based mainly on practical considerations, the principal of which was the dominant role that the United Kingdom's economy played in Ireland's external trade.
The 1942 Act conferred the Central Bank with a "general function and duty" of "safeguarding the integrity of the currency", and, echoing a phrase from Article 45 of the Constitution, ensuring that "in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole". In conferring on the Bank the power to formulate and implement monetary policy, the Oireachtas was reflecting the advice tendered to the Government by the Commission of Inquiry into Banking, Currency and Credit in 1938. Likening the independence of central banks to that possessed by the judiciary, the Commission emphasised the need to keep a central bank "free from political pressures". In the Dail debate on the Central Bank Bill, 1942, the Minister for Finance reinforced this when he said that " the Central Bank here should be independent and should not be at the beck and call of the Government at all times or at any time. It should be free to make a decision".
While the new Central Bank was assigned certain powers to support it in achieving its "general function and duty", many functions regarded in other countries as characteristic of central banks were not assigned to the Bank. In particular, it had no specific statutory power to restrict credit, it did not become the banker to the Government and the country's reserves of foreign currencies continued to be held largely by the main clearing banks.
The 1950s and, especially, the 1960s, were periods of significant change for banking systems in most countries, including Ireland. The Central Bank reacted to changed circumstances by gradually extending its sphere of influence, notably through the centralisation of the country's foreign currency reserves at the Bank towards the end of the period. The last 25 years have been a particularly active period of change for the Bank. Its powers were greatly expanded, especially in two major Central Bank Acts (1971 and 1989). Moreover, Ireland's accession to the European Economic Community in 1973 and its subsequent membership ofthe European Monetary System in 1979 - following a decade in which the inflationary implications of being linked to sterling called into question the continuation of that relationship - gave the Bank a much more significant role in both domestic and international monetary affairs. The Bank's anti-inflationary and financial supervision roles came into increasing focus as did its activities in stimulating the development of domestic foreign-exchange and money markets.
The Central Bank of Ireland's main responsibility can be summarised as the management of the country's monetary system in the public interest. This, essentially, involves protecting the purchasing power of the currency and ensuring that there is a stable and efficient system for taking deposits, extending credit and making payments in the State. The main functions of the Bank - and their relationship to its structure which is set out in the following section - are described briefly below.
(i) The formulation and implementation of monetary policy
Early each year, proposals on the appropriate stance of monetary policy for that year are prepared by Monetary Policy and Statistics Department Following discussion by the Board, the annual Statement on Monetary Policy is published in the Bank's Quarterly Bulletin. The monetary policy stance adopted is periodically reviewed during the course of the year. The widening of the EMS fluctuation bands last year altered the environment in which monetary policy is formulated, but the objective of low inflation remains unchanged.
Monetary policy is implemented, on a day-to-day basis, mainly by means of the money-market support systems administered by Accounts Department. The Bank uses certain instruments to supply or absorb liquidity (sale and repurchase agreements, swaps, fixed deposits, the Short-Term Facility) in order to smooth the evolution of interest rates on the domestic money market. The Bank can also use these instruments to signal changes in short-term market interest rates when the Bank feels that they are warranted.
(ii) Exchange-rate policy
The Bank also has the task of implementing exchange-rate policy, which it does mainly through its monetary policy operations, as described above, and, where necessary, through foreign-exchange market interventions. The determination of exchange-rate policy is the prerogative of the Government. The Minister for Finance has the power to "vary the general exchange-rate arrangements for the time being for the Irish pound" and "to make specific exchange-rate adjustments consistent with these arrangements". In either case, however, he is obliged to consult the Bank before doing so. This right to be consulted on exchange-rate policy, coupled with its statutory function in relation to "safeguarding the integrity of the currency" gives the Bank a particular interest in the formulation of that policy. A number of departments contribute to the Bank's work on exchange-rate policy, including the International Relations, Economic Affairs, Research and Monetary Policy and Statistics departments.
(iii) Acting as holder and manager of Ireland' s foreign currency reserves
The Bank holds foreign currency reserves to enable it to conduct foreign-exchange market interventions when these are considered necessary to support the Irish pound. Having regard to this objective, a large proportion of the Bank's reserves is held in highly liquid form. Subject to this constraint, Foreign Department seeks, in managing the bank's holdings of reserves, to maximise the return on the portfolio with a minimum of risk.
(iv) Licensing and supervising banks, building societies and certain other financial institutions
The Bank's responsibilities in these areas are carried out by Credit Institutions Supervision Department and Financial Sector Department. The Bank has supervisory responsibility for licensed banks, building societies, the TSB, ACC Bank, ICC Bank, certain institutions in the International Financial Services Centre, the Irish Financial Futures and Options Exchanges, money brokers and certain Collective Investment Schemes. It is proposed that the Bank will, in the near future, take over responsibility for supervising the Stock Exchange and its member firms. For credit (i.e. deposit-taking) institutions, supervision involves off-site surveillance and on-site inspections. The former involves the examination of detailed financial returns received from the credit institutions on a regular basis; the latter involves examinations of the books and records of the institutions. Other institutions are required to submit regular reports to the Bank on their activities, the extent and frequency of such submissions depending on the prudential sensitivity of the activities involved, and the Bank also conducts on-site inspection where appropriate. The Bank holds regular meetings with the institutions it supervises to review their business and their compliance with Central Bank requirements.
(v) Producing and distributing currency
These functions are performed by the Currency Issue and Currency Printing Departments located at the Bank's Currency Centre in Sandyford, Co. Dublin. Notes and coins are produced and issued by the Currency Centre. In addition, used notes are processed and those not of reissuable quality are destroyed. In recent years, the banknotes and coinage have been undergoing a process of redesign. The new notes are smaller than the old ones and incorporate a number of enhanced security features. The Bank is constantly vigilant to guard against forgery of banknotes and maintains close liaison with the Garda Authorities.
(vi) Overseeing the operation of Irish financial markets and the payments system
The Bank oversees the operations of the wholesale money and foreign-exchange markets, which are the fulcrum through which the Bank implements monetary and exchange-rate policy. The Bank's contacts with these markets is maintained by the Accounts and Foreign Departments. The Bank has taken a leading role over the years in developing these markets, attempting at all times to promote their efficient and effective operation, as well as seeking means by which they might be widened and deepened.
The Bank has also sought to advance the development of the payments system in Ireland, particularly in relation to large-scale interbank funds. Surveillance of the payments system is conducted by Accounts Department. In addition, the Bank has, since 1989, operated a Gilts Settlement Office, located in Government Loans Department, which provides a guaranteed settlement system for wholesale transactions in government securities.
(vii) Holding the Exchequer's bank account and acting as a registrar for govemment securities
The Government's bank account is held at the Central Bank and maintained by Accounts Department. The Government keeps sizeable amounts on deposit at the Bank (for example, at end December 1993, deposits on the Exchequer account totalled £1.4 billion). Arising from the Treaty on European Union, the Bank is prohibited from extending credit to the Government and, in consequence, may not provide an overdraft facility. This facility had not, in any event, been availed of for a number of years. Government Loans Department maintains the register for stocks issued on the domestic market by the Government, the Housing Finance Agency and the European Investment Bank.
(viii) Participating in international organisations and forums
The Governor represents the Bank at regular meetings of the Council of the European Monetary Institute (EMI). The Council's tasks include strengthening the co-ordination of the EU monetary policies, overseeing the operation of the EMS and preparing for Economic and Monetary Union (EMU). International Relations Department prepares briefing material for these meetings. The EMI's work is supported by a number of specialist sub-committees and working groups on which the Bank is also represented. In addition, officers of the Bank participate in meetings of the Monetary Committee and the Economic Policy Committee of the EU, and in meetings of the Organisation for Economic Co-operation and Development (OECD), the Bank for International Settlements (BIS) and the International Monetary Fund (IMF). The Bank also, under the aegis of the IMF and EU, provides technical assistance to the developing countries and countries in transition to market-based economies.
The Central Bank is legally accountable to both Houses of the Oireachtas. Within six months of the end of the year the Bank is obliged to send a report on its activities to the Minister for Finance, who in turn must send it, as soon as possible after receipt, to both Houses of the Oireachtas. The same six-month limit applies to the transmission of the Bank's annual accounts to the Comptroller and Auditor General, who sends the audited and certified accounts and his report thereon to the Minister, for subsequent transmission to each House of the Oireachtas. The statement of accounts and annual report on its activities are published by the Bank in conjunction with one of its Quarterly Bulletins, which are also employed to provide cornment and analysis on monetary, economic and fiscal developments. In addition, the Governor has recently agreed to appear, on a voluntary basis, before a Standing Committee of the Oireachtas and this is expected to occur in 1994.
The Central Bank's activities are conducted and managed by a Board of Directors consisting of the Governor, who is the chief executive officer of the Bank, and up to nine non-executive directors. The Governor is appointed by the President, on the advice of the Government, for a seven-year term - two years longer than the maximum possible term of both Houses of the Oireachtas. The directors are appointed by the Minister for Finance for overlapping five-year terms. A maximum of two of the Bank's directors may be "service" directors, i.e., persons in the permanent service of the State (civil servants) whose tenure of office is wholly at the Minister's discretion.
The Bank has the power to recruit such staff as it considers necessary for it to conduct its operations and, at the end of 1993, the total number of employees amounted to 616 persons. The management structure through which the day-to-day administration of the Bank is undertaken is shown in the diagram below.
Diagram to be inserted.
Along with other central banks in the European Union, the Central Bank must devote much of its energies currently and over the years ahead to preparing for Economic and Monetary Union. If, as seems likely, Ireland enters Stage 3 of EMU, the Bank will be part of a system of central banks with full protection under the Treaty from outside interference in pursuit of its primary objective, namely, the maintenance of price stability. While the respective contributions of the European Central Bank (ECB) and national central banks remain to be clarified, the principle of subsidiarity underlying the Treaty should ensure a major continuing role for national central banks. In any event, whether the Central Bank performs its functions directly, or through the medium of the Governor, as member of the the Governing Council of the ECB, the coming years promise to be ones of much change and considerable challenge.
MANAGEMENT STRUCTURE OF THE BANK
Governor
Maurice O'Connell
General Manager
Michael P. Coffey
Deputy General Manager
and Secretary to the Board Padraig McGowan Functions Head of
Function
- Accounts - Liam O'Reilly
- Foreign - Samuel McConnell
Assistant General Manager
Liam Barron - Credit Institutions Supervision - Dara Mc Cormack
- Financial Sector - Gerry McGrath
- Information Technology - Padraig O'Conaill
Assistant General Manager
Louis O'Byrne - Currency Issue - Donal Cahalane
- Currency Printing - Brendan Delaney
Senior Adviser
Michael G. Casey - Economic Affairs - Thomas O'Connell
- Monetary Policy and Statistics - Peter Charleton
- Research and Publications - Frank Browne
Assistant General Manager
George E. Reynolds - International Relations - John O'Leary
- Government Loans - Bill Casey
Assistant General Manager
Brian P. Halpin - Personnel - Michael J. Farren
- Management Services - Jim Cummins
- Internal Audit - Lorcan Kirwan
Garrett F. Murphy is on special leave from the Bank as Alternate Executive Director of the International Monetary Fund.