Saturday, September 20, 2014
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Central Bankers in the Line of Fire

CHICAGO – Central bankers should not only be above suspicion of wrongdoing, but also appear to be above it. So the decision in January by Philipp Hildebrand, Chairman of the Board of the Swiss National Bank (SNB), to resign over allegations relating to a suspicious currency trade made by his wife, is to be welcomed. But, while Hildebrand’s resignation should serve as a precedent to be followed by central bankers – indeed, all public officials – everywhere, the circumstances surrounding his departure smell much worse than what caused it.

On August 15, 2011, Hildebrand’s wife, Kashya, exchanged 400,000 Swiss francs into dollars. On September 6, Hildebrand announced that the SNB would cap the value of the franc against the euro, thus de facto forcing a depreciation of the franc vis-à-vis all other major currencies. As a result, the value of his wife’s investment soared by almost 20%. While Hildebrand claims to have had no knowledge of the transaction that day, he resigned because it was “not possible to provide conclusive and final evidence” that his wife, a former hedge-fund manager, traded without his knowledge.

A central banker should put his and his spouse’s money in a blind trust. Even if he did not know about the trade, Hildebrand committed an error of judgment in not reversing the transaction immediately. His resignation was warranted – as is enhanced disclosure of central bankers’ personal finances around the world.

Nonetheless, the circumstances of Hildebrand’s departure might be more worrisome than his lapse of judgment. Hildebrand was not just any central banker: he stood out for his independence, not only from political authority, but also from the banking sector. He spoke very early and strongly in favor of higher capital requirements for big banks, which also opposed his heterodox intervention in the foreign-exchange market.

Most importantly, together with the Swiss finance minister, Hildebrand introduced the “Swiss approach” to bank regulation. This approach demands much higher capital buffers for banks. Rather than going along with the new 8% reserve requirement adopted elsewhere, the SNB now demands equity capital equal to 19% of risk-weighted assets, of which 9% can be held in convertible capital, while 10% must be held in common equity.

Any economist would consider these policies wise, but they won him few friends in the business world. In an unprecedented attack, Switzerland’s major business magazine Bilanz accused him of having an “unsteady hand” on the central bank’s rudder. He was also attacked by a leader of the right-wing Swiss People’s Party (SVP).

I was born in the country of Machiavelli, and yet I still find it remarkable that, after all these attacks on Hildebrand, the stolen private record of his family’s bank account was leaked to a vice president of the SVP, who made it public. Would the record not have been stolen, or would the SVP vice president have refused to use it, given its illegal origin, had Hildebrand been more accommodating toward special interests?

More importantly, I wonder whether his successor at the SNB – and all other central bankers – is asking the same question. After all, this is one way in which regulatory capture happens. When the regulated do not like the regulation, they jeopardize the regulator’s career. More often, they influence regulation by dangling before the regulator the promise of lucrative future employment. Since Hildebrand was independently wealthy, this approach would not have easily worked with him. So did he receive the stick instead of the carrot?

Fortunately, we have a good independent test. The head of the European Banking Authority, Andrea Enria, has issued new regulations that are not bank-friendly. While one can debate the appropriateness of tightening accounting standards in the middle of a crisis, his order that banks increase their capital is entirely justified, especially at a time when the European Central Bank is subsidizing them with a wall of three-year liquidity at almost zero cost.

The banking industry was not sparing in its criticism. The head of the Italian Banking Association even threatened to sue Enria personally.

If Enria were to resign or – God forbid – be forced out by a scandal in the near future, bank regulators everywhere would get the message: “Nice job you have there – it would be a shame if anything happened to it.”

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