Monetary Law Blog

Bank of England Under UK Parliament Scrutiny

Governance at the Bank of England must be strengthened to reflect its new powers, parliamentarians (MPs) on the Commons Treasury Committee have demanded in a report published this week ('Accountability of the Bank of England'). 

Main recommendations:

• The Court of the Bank of England should be transformed into a smaller, more expert Supervisory Board with its own staff.
• The Minister of Finance ('Chancellor') should be responsible and accountable in a period of financial turbulence where public money is at risk; in these circumstances the Chancellor should be given a temporary and limited power to direct the Bank, according to MPs. 

The MPs also propose that:

• The Governor of the Bank be appointed for a single, non-renewable term of 8 years.
• A majority of external members sit on the Financial Policy Committee (FPC) and the Monetary Policy Committee (MPC).
• The new macro-prudential tools to be given to the FPC  be subject to thorough parliamentary scrutiny.

 

German Court Upholds Greek Bailout

While upholding the aid to Greece and a euro rescue package, the German Constitutional Court has concluded that for future financial guarantees the Federal Government should obtain prior approval from the German Parliament.

On September 7, the Court rejected three constitutional complaints directed against German and European legal instruments and other measures in connection with the aid to Greece and with a euro rescue package.

The Court decided that by adopting these Acts, the German Parliament did not impair in a constitutionally impermissible manner its right to adopt the budget and control its implementation by the Government or the budget autonomy of future Parliaments.

However, the Court also noted that § 1.4 of the German Euro Stabilization Mechanism Act merely obliges the Federal Government to strive to reach an agreement with the Parliament’s Budget Committee before giving guarantees. This is not sufficient, so the Court concluded; instead, guaranteeing parliamentary budget autonomy requires an interpretation to the effect that the Federal Government is in principle obliged to always obtain prior approval by the Budget Committee before giving guarantees.

 

German president questions legality of ECB bond buys

Reuters.com reports that German President Christian Wulff questioned the legality of the European Central Bank's bond-buying programme on Wednesday, highlighting the strength of opposition in Germany to the controversial plan.

Reportedly, Wulff added his voice to German opposition against the ECB's bond-buying programme citing a Treaty provision prohibiting the ECB from buying bonds directly from governments.

"I regard the massive acquisition of the bonds of individual states via the European Central Bank as legally questionable," he said in the opening speech at an economists' conference in Lindau, Germany. "This ban only makes sense if those responsible don't circumvent it with comprehensive purchases on the secondary market," he added, so Reuters.com reports.

The ECB buys the bonds on the secondary market. Critics of the purchases say they push the ECB into the fiscal policy arena, overstepping its mandate and threatening its independence.

Legal Framework for Eurosystem National Central Banks

by Andres Tupits (Senior Associate at Sorainen)

My recent PhD thesis at the University of London analyses legal issues related to the participation in the Eurosystem by a national central bank (NCB). My aim is to develop principles that could be used for a national central bank law for a European Union Member State that has adopted the euro.

The transfer of monetary policy to the supranational level has substantially changed the European central banking framework and confronted the NCBs with their new role as members of the Eurosystem.

This membership has affected the governance structures of NCBs, with the emphasis on Governors and their independence. Most of the changes relate to the fulfilment of tasks of the Eurosystem and the level of independence needed by the NCBs to carry out these tasks. I have found that although there are differences amongst the Member States, the understanding of central bank independence is fairly similar throughout the EU.

The accountability of the NCBs is driven not by the EU but by national rules, which is why the extent of reporting commitments varies between the Member States. The same is true of transparency, with some NCBs tending to be more open towards the general public than the others. However, it remains debatable whether there should be a harmonisation of rules on transparency and accountability at the EU level and whether the establishment of such harmonised rules would set higher standards than the current average.

A debate on whether the prudential supervision of credit institutions should be a European rather than a national matter has been going on for a number of years, and I would like to add to the discussion as far as the financial stability and ESCB-related tasks are concerned.

Finally, on the basis of the Estonian NCB Statute, I suggest amendments reflecting best practices for central bank tasks, independence and accountability.

German Constitutional Court to Hear Euro Bailout Challenge

Reuters reports that Germany's highest court will begin hearing a lawsuit against the financial efforts to stem the euro zone crisis on July 5.  The lawsuit against euro zone rescue packages, filed last July by a group of five eurosceptics led by economist Joachim Starbatty to Germany's Constitutional Court, says creating the euro zone rescue funds violates the EU no-bailout clause.

Because aid provided to Greece was approved in the German parliament, the law for ratification of the aid packages falls under the jurisdiction of the Constitutional Court.

Follow this link for more info.

 

ECB prepares emergency liquidity facility for troubled euro zone banks

The European Central Bank is putting together a lending facility for troubeled euro zone banks. Reuters quotes a source saying that "this will replace the ELA (Emergency Liquidity Assistance) that is currently being provided by the Irish central bank." Reportedly, the plan will initially be tailored for Irish banks and subsequently be available euro zone wide.

Spanish Town 'Reintroduces' Peseta

A small town in northern Spain has decided to reintroduce the old Spanish currency - the peseta - alongside the euro to give the local economy a lift. Shopkeepers in Mugardos want anyone with forgotten pesetas to come and spend it.

The BBC reports that people are travelling to Mugardos just to spend the old currency they never got round to converting. When the euro banknotes and coins were introduced in January 2002, Spaniards had three months to exchange their pesetas for euros at any bank.

The Bank of Spain estimates that pesetas worth 1.7bn euros ($2.4bn) are still unaccounted for. That cash can still be converted today, but only at the Bank of Spain itself. So the Bank may expect some business from shopkeepers from Mugardos.

 

ELA: An Emperor without Clothes?

Emergency liquidity assistance (ELA) by the Irish central bank (CBI) is the subject of a recent Citigroup Global Markets' note authored by Willem Buiter, Jürgen Michels, and Ebrahim Rahbari. They comment, from a legal and economic perspective, on CBI's ELA to Irish banks against the backdrop of the euro area's stress and the possibility of insolvency of either or both the CBI and the Irish sovereign.

Follow this link to the note.

Happy New Year ...welcoming Estonia to the euro area

All the best to all of you. In particular our friends in Estonia who joined the euro area on January 1, 2011.

Netherlands Plans to Make Call for Bank Run a Criminal Offense

The Dutch government intends to make calls for bank runs a criminal offense. At the start of 2011 the Dutch Ministry of Justice plans to send a draft bill amending the Dutch Criminal Code, it said in a statement today. Under the draft legislation, inciting customers to withdraw their money from a bank may lead to a maximum punishment of a 19,000-euro (approx. $24,881) fine or a four- year prison term.