Bailey: CBI concept incomplete for financial stability

Bank of England Governor Andrew Bailey traced the evolution of central bank independence (CBI) from its early notions, citing Henry Thornton's 1802 assertion of the Bank's independence from government, rooted in an alignment of interests and the anchor of money's value.

Following the 20th century, particularly the 1970s, CBI transitioned to formal statutory powers, as seen in the UK, with operational independence focused on monetary stability.

Bailey highlighted that while monetary policy CBI is well-established through the time consistency argument—delegating policy to an independent body to prevent governments from creating inflation for short-term gains—the application of CBI to financial stability presents a less robust framework.

This difference stems from the broader, less measurable remit of financial stability and its direct impact on private interests, creating more potential for conflicts.

Bailey argued that financial stability differs from monetary policy in its scope and impact, making its delegation a less robust contract.

Financial stability policies interact directly with private interests, creating more potential for conflicts between public good and private concerns, as seen in bank capital debates.

He noted a striking lack of literature on financial stability CBI, despite its tendency to be viewed as tangential or even in conflict with monetary stability.

Bailey identified two consequences: a pro-cyclical approach to financial stability, often neglected until a crisis, and a fundamental difference in the nature of CBI itself.

Monetary stability is easier to define with a single numerical target, simplifying its legislative capture, whereas financial stability is a 'large canvas' defined by the absence of instability across many dimensions and engaging many private interests.