Since the 2008 crisis, there are two kinds of views on central banks. The first view is central banks have lost independence and are catering mainly to governments and fiscal policy. The second view is central banks have become all too powerful and need to be made more accountable to public for their actions.
Some of the central banks have taken a middle path — without thinking of themselves as too powerful they have tried to make them more accountable over the years. They have simplified communications with citizens, use cartoons to explain policy, engage in central bank listens events, and so on.
The European Central Bank (ECB) has recently made some policy changes in this direction. Most central bankers and regulators have issued a whistleblowing policy for banking and capital market sectors. The policy protects whistleblowers who wish to point to frauds and corruption in their respective firms. Taking a leap forward, the ECB has decided to bind itself in its whistleblowing policy as well.
In October, the ECB, via a press release, announced ‘an enhanced internal whistleblowing framework to protect the integrity of the institution’. The enhanced whistleblower framework is part of its ethics framework which was adopted by the ECB in 2011. The framework was an attempt to bind ECB’s employees to conduct their duties in a conscientious and honest manner.
In 2014, the ECB got additional powers of bank supervision and the central bank implemented the whistleblower policy like other regulators. However, even then the ECB decided to extend its policy to itself and national central banks which are part of the European System of Central Banks: ‘The whistleblowing platform provides a means to report suspected breaches of relevant European Union law by a supervised bank, national supervisor or the ECB itself.’
Under the enhanced framework, the ECB has extended the whistleblower policy to all the tasks of the central bank and includes all the top officials. One can even blow the whistle against the president of the ECB. It has also developed a new internal tool which allows anonymous reporting on ‘potential breaches of professional duties, inappropriate behaviour or other irregularities, and the possibility for whistleblowers and witnesses to request protection from retaliation.’
Further, the ECB streamlined the procedure for assessment and follow-up to ensure that the central bank takes decisions on the breaches in a shorter period of time.
With this whistleblower policy, the ECB has tried to send a strong signal that no one is above the law. Central banks across the world should look at the ECB whistleblower policy and bring themselves under similar policy. There are several benefits of such a policy.
First, central banking, like general banking, is based on trust and integrity. Those employed in these organisations should ensure that the trust is not breached in any condition. However, there will always be times when individuals, especially at senior positions, engage in policies/breaches which could lead to problems in future. A whistleblower policy will hopefully deter the senior individuals from engaging in any such conduct.
Second, after the 2008 crisis, central banks have taken stringent actions against erring banks and are also trying to push for a better culture at financial firms. It is fair that central banks bring themselves into the ambit as well.
Third, an internal whistleblower policy tries to answer the criticism of the second camp mentioned above. The scepticism of the second camp comes from the easy monetary policies followed by central banks which created moral hazard amidst the financial institutions leading to the 2008 crisis. To add to the irony, central banks continued with similar easy policies to address the crisis.
Central banks have engaged in wide-ranging easy policies from lowering interest rates to buying all kinds of assets. The central banks’ response has been that they made policies to deal with the economic and financial conditions. An internal whistleblower policy will hopefully help balance the disagreements between the two sides.
Fourth, the policy will also help address concerns of the first camp. If indeed the central banks are bowing to government power, a whistleblower could help uncover the truths. There is a lot of secrecy in relationship between the government and central bank. One outcome of such a policy could be that both governments and central banks begin to disclose their otherwise secret discussions for fear of being reported.
To sum up, the ECB’s internal whistleblower policy is a useful addition to the ongoing efforts to increase transparency in central banks. However, the proof of pudding lies in eating. The policy will only work if there are whistleblowers and the ECB top management will have to encourage reporting of such breaches.
It has to be seen whether other central banks will also adopt this policy. If they do, we could see opening of several can of worms in the world of central banking.
Amol Agrawal is faculty at Ahmedabad University. Views are personal.
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