Central Banks

16.3.1 Overview

16.3.1.1 Definition

A national bank or central bank is the bank of a state or currency area and has central responsibility for the functioning of the monetary and credit system.

The bank’s main task is to ensure price stability, currency stability and financial stability. The central bank is the guardians of the national currency. The ratio between the money stock of a currency and the gross domestic product must be kept stable to avoid inflation.^[1115] Therefore, they have the monopoly on the printing and issuance of national currency in coins and banknotes. It is the bank of all banks in the country and eventually also the “lender of last resort”^[1116] to the state and other banks.

A national or central bank shall also support the respective Government of a country by implementing its monetary policy. The state, in return, guarantees sufficient financial resources for the bank and is liable for them. However, the establishment of such a bank by the constitution alone is not enough. Ordinary law must specify the provisions of the constitution.

Below both, not only the establishment of the bank and its scope of duties will be discussed, as well as the appointment rights for the bank’s executive body, which are classically assigned to other organs in the constitutional structure.

16.3.1.2 Historical Context

The history of the first national or central banks dates back to the seventeenth century in Europe. At that time, numerous of partly known and partly unknown coins were in circulation. This made trading more difficult as the value of the various coins in circulation was not assured.

Pioneer in the issuance of banknotes, one of the core competencies of a national bank was Palmstruch-Bank, the predecessor of the Swedish National Bank. The institute was founded in 1656 and appointed by the King of Sweden to issue banknotes. In 1668, the Swedish Riksbank was founded as a joint stock bank that could even lend money to the government.^[1119]

In 1694 the Bank of England was founded and became one of the most respected banks for the next centuries in the world. Other English banks were entitled to open an account with the Bank of England and deposited their own funds with a bank. It thus became the bank of banks in the state, one of the key qualifications of a national bank. The Banque de France was founded in 1800 by Napoleon Bonaparte as an outcome of the French revolution.

The US Congress founded the American Federal Reserve System (“FED”) in 1913 under President Wilson. The Peoples Bank of China (“PBoC”), the Chinese Central Bank was originally founded as a part commercial central bank in 1948 and was transformed to the sole central bank in 198 3.^[1120] In 1962 the Bank of West

Fig.

African States (“BCEAO”) was founded. Today’s members are Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo (Juli 2022).

The European Central Bank (“ECB”) was founded in 1998 and became since 1999 the Central Bank for all 19 countries having the Euro as their currency.^[1121] This example stresses the fact that the task of a central bank is particularly currency­specific and not necessarily country-specific.^[1122]

16.3.1.3 Structural Approach and Guiding Question

We are suggesting a two-stage approach for almost all aspects of the constitutional design of the Central Bank. At each of the steps described in Fig. 16.5, the legislator needs to ask himself the question whether he wishes to include a provision in the constitution and how he wishes to structure it. No particular tendency prevails to include articles on the national bank. Relatively recent constitutional reforms from Thailand in 2017, the Ivory Coast and the Central African Republic in 2016 and Nepal in 2015 do not contain any articles about the country’s own central bank.

Table 16.10 | | Establishment clauses for central banks

16.3.2 Details of the Central Bank Clause

16.3.2.1 National Bank as a Mandatory Part of the Constitution

The first question to answer is whether the constitution already has provisions about the establishment of a national bank as the Central Bank of the state. Articles on the establishment of a National Bank are by no means a mandatory part of a constitution. Countries like Spain, France, Syria or Denmark have no clause in their constitution governing the establishment of a National Bank. Countries such as Armenia, Colombia or Georgia have detailed regulations in their constitutions. Other countries, such as Germany, for example, opted for a short regulation and then developed the organization of the National Bank in the ordinary laws.^[1123] Given the importance of the bank for a country and its currency, it is advisable to include respective wording within the constitution.

16.3.2.2 Scope of Provisions

Depending on constitutional tradition, individual clauses on the national or central banks were in part briefly worded with a reference to national law. Other articles are more extensive. The decision on a short or long clause is the crucial point at the outset. Due to the many and varied tasks of a national bank, not all competences can be stipulated in the constitution. Rather, the constitutional specifications and guarantees must be shaped and substantiated under the ordinary national law. It is the challenging task of the legislature to strike a balance between completeness and practicability in the design of such articles.

16.3.2.3 Establishment Clause

If an agreement has been reached on the inclusion of articles on a national or central bank, the establishment of such a bank must be included in the constitution.

Besides the actual establishment, any other qualification of the bank is appreciated. Thus, clarity can be provided here by stating the nature of the legal personality and the ownership. A look at the constitutions of the listed countries reveals a multitude of other formulations that all serve the same purpose.

16.3.2.4 Allocation of Powers

Most of the constitutions examined summarized the core tasks and characteristics of a National or Central bank.

The six core characteristics of a Central Bank (shown in Table 16.11) are not always laid down explicitly in every constitution. For the purpose of completeness, however, all these competences should be included in a constitutional clause.

The legislator is free to enumerate the core competencies of the central bank and can design these as part of its sovereign powers. Particularly in the overall frame­work of a constitution, special attention must be given to safeguarding indepen­dence. Central Bank independence can be described as the freedom of monetary policymakers from the direct influence of political or governmental influence.^[1124] This independence should, of course, be legally formed, but it should also be respected de facto. The independence of the bank always includes the influence of the current government. Among the rights affecting the bank’s independence are the aforemen­tioned appointment rights, voting rights, budget control, but also information rights and the duty of accountability.

The Cukiermann, Webb and Neyapti index^[1125] can be used as an example to determine the degree of independence. According to this index, the level of inde­pendence is determined by four criteria. The first criterion is the definition of the role of the chairman and his appointment, dismissal and duration of his term of office. The second criterion is the formulation of the rules governing cases of conflict between the Government and the central bank with regard to the formulation of monetary policy and questions relating to the bank’s budget.

16.3.2.5 Executive Body

The National Bank’s governance structure can be diverse and is usually aligned with national legislation. Ultimately, it is the task of the national legislator to create a

Table 16.11 | The six core characteristics of a central bank

Table 16.11 (continued)

Table 16.12 | Examples of governing clauses for central banks

structure that ensures the functional management and supervision of the National Bank. In different constitutions e.g., the executive body is sometimes referred to as a board or sometimes as a council. Some constitutions regulate the number of members of the board directly in the constitution; other constitutions refer to the ordinary law. The same applies to the term of office of the members. A good example of the constitutional design of the executive body can be found in the Armenian constitution in art. 201. A single article stipulates the number of board members, the electoral procedure, the election quorum, the term of office, the consecutive terms, the requirements for candidates for election as well as rules on incompatibility and other permitted occupations.

Table 16.12 summarizes how the executive body of the bank is referred to.

When designing the board, the intended decision-making process must always be taken into account. If resolutions are to be passed by a simple majority, an uneven number of members should be chosen, or, for example, the chairperson should then

have the deciding vote. In the case of other majority requirements, the number must be chosen in such a way that it can be achieved in a certain personal proportion.

16.3.2.6 Term of Office

Due to the many design possibilities, the constitution can already contain provisions on the term of office.

Table 16.13 contains some examples from different constitutions. However, the table is far from conclusive.

In order to guarantee the independence of the National Bank, it is recommended that the term of office be determined independently of the legislative period in order to avoid a coincidence between the Government and the board. This regulation is also possible for ex officio members, since in this case only one seat has to be replaced and the bank’s ability to work is therefore not endangered.

16.3.2.7 Personal Qualification

Mandatory requirements for members of the administrative organ of a Central Bank may also be stipulated in the constitution. In the Afghan constitution, for example, there is a provision that the members of the board “shall not engage in any profitable business”.^{[1126] [1127] In the Armenian constitution it is stipulated that “during their term in office, the Board members of the Central Bank may not be members of any party or otherwise engage in political activities. In public speeches, they shall exercise political restraint'’1'1 and that “the Central Bank Chairman and other members of the Board shall be subject to the incompatibility requirements stipulated for parliamentarians.”[1128] As an exemption, however, the members of the Board “have the right to hold, in commercial organizations and foundations, a position stemming from their function[1129]’.}

Table 16.14 | | Appointment of central bank board members

16.3.2.8 Appointment of Board Members

An initial distinction can be made between appointment by Parliament, by the President and shared appointment by several state authorities. This separation also arises from the relevant presidential or parliamentary system. In some cases, certain persons, such as ministers, are ex officio members. One constitution also already contains a provision for the dismissal of a member of the executive body. It is recommended to stipulate a clear separation between the selection process of the person and the appointment to the office. The selection decision should be democratically legitimated and indirectly traceable to the people of the state.

Table 16.14 presents a variety of options available to the legislator.

From the author’s point of view, it is preferable to have an election of the members of the board in which several state bodies have to participate. This can be done by separating proposal from appointment or confirmation. In this way, mutual control can take place and, at the same time, sufficient democratic legitimization can be created. Increased quorums such as a 2/3 or 3/4 majority in the election of the persons can still support a respective legitimization. If the entire executive committee is elected at once, a corresponding legitimization can be achieved by separate proposal and election rights of the Government and the Parliament.

Likewise possible a constitution can stipulate appointment rights for state organs that have already been democratically legitimized. In Germany, for example, all members of the board of directors are appointed by the President. The President, the Vice-President and one other member are nominated by the Government. Three further members are proposed by the “Bundesrat”, the assembly of delegates of the federal states, with consent of the Government.

16.3.2.9 Appointment of a Chairperson

The chairperson naturally has an exceptionally exposed role in a Central Bank. Therefore, the appointment also requires a special provision in the constitution. A distinction must be made between nomination and selection. A constitution may also contain provisions that require separate third-party approval. Government systems and existing constitutions vary from country to country. That is why there are so many ways in which a chairperson can be appointed. An initial distinction can be made if the existing constitutional systems are divided into constitutions of presi­dential, parliamentary and monarchical forms of government.

Unsurprisingly, in a monarchical system, the king or queen can have the right to appoint the chairperson even if its role is that of a representative of the state and not of an absolute ruler of his country. In a presidential system, the President often has the right to appoint the chairperson. In this system, however, the consent of Parlia­ment or a third person may also be required. In a parliamentary system, the appointment may be made by Parliament, a minister or a specific body provided for in the constitution. In this case, too, the approval of a second instance may be required, too.

The term of office of the chairperson sometimes covered in the constitution. Table 16.15 also includes options that are regulated in some countries by ordinary legislation.

As Table 16.15 shows several possibilities for the appointment of the chairman of the bank exist. In order to find a broad democratic consensus, it is recommended that several state authorities reach an agreement. The actual compliance with these provisions must be monitored from all sides. The Russian and the Azerbaijan model, for example, in which the chairperson is proposed by the President and appointed by Parliament, de facto empowers the President to determine the chairperson.^[1130]

Table 16.15 | | Appointment procedure and term of office of the chairperson of a central bank

(continued)

Table 16.15 (continued)

Table 16.16 | | Accountability of the central bank

Table 16.17 | Subconstitutional examples of central bank clauses

16.3.2.10 Accountability

In order to avoid political abuse, Central Bank must be able to act independently of current politics. However, this independence may not lead to a situation in which the bank is not subject to any control. A constitution should therefore contain mandatory provisions requiring the bank's board of directors to report regularly and compre­hensively to Parliament, the President, a responsible minister or a responsible body created for that purpose.

An ideal structure can be established if there is an independent information right for the state authorities in addition to existing reporting obligations, which are stipulated in time, in order to be able to act quickly based on this information in extraordinary situations (see Table 16.16). The precise and detailed stipulation of these rights can then be carried out at the level of ordinary law.

The development of information and control rights is one of the most important and difficult tasks for the constitutional authority. The independence of the Central Bank must be safeguarded at all times. It is preferable to have ongoing reporting obligations within a fixed time frame as well as information rights for the executive or legislative authorities in emergency situations. In the case of information rights in particular, the corresponding emergency situations must then be adequately regulated, whereby this can be done more easily at the level of the ordinary right. Particularly in the case of information provided by the legislator, the protection of minorities in the election of a quorum should also be ensured, so that an opposition also has open access to information.

16.3.2.11 Sublegal Reference

As has often been mentioned, the regulations governing the Central Bank can only provide a framework for the activities of the national banks in conjunction with ordinary national legislation. The reference to national law is at the same time a challenge for the simple legislator to implement the principles established by the constitution in the ordinary law. This enables the constitutional legislator to write a catalogue of tasks in the constitution, which is then regarded as the direction or a new line of approach (Table 16.17).

To summarize, it can be said that the clauses on a national bank leave a multitude of potential structuring options open. The examples listed only give an overview of the existing possibilities. With the present modular system of clauses and examples, however, it will be possible to revise existing clauses or to tailor new suitable clauses.