Should the financial stability regulator be the central bank?

It is an interesting question. First, note that Ben's recent call for US regulatory overhaul is welcome, if overdue. Both the politics and the practicalities of any change are formidable, however necessary it is.

Even the question of role of the central bank is redolent with issues. If they are not the stability regulator, then how is the interaction between financial stability and monetary policy managed? But if the central bank does take this role, how do they balance the needs of the broad economy (which typically suggest looser policy) with financial stability? This is especially difficult as many central banks (yes, I'm thinking of you guys in Frankfurt) have a rather conservative attitude. Moreover Northern Rock shows that if stability is divorced from supervision then problems can fall in the gap between the two agencies. An uber-supervisor of insurers, hedge funds, banks and broker/dealers with both markets and financial stability responsibilities and the ability to strongly influence monetary policy is one alternative. But if a body like this gets it wrong, there is no check or balance.

I honestly don't know what the right answer is. But I certainly believe that the current US answer - FED, SEC, OCC, FDIC, OTS, OFHEO, CFTC, State Insurance commissioners, and UTC (Uncle Tom Cobley) isn't ideal. And when you factor in the global dimension, as the FT emphasises, things get even tougher.

Update. There is an interesting update from the FT here. The salient idea: There are arguments for adopting the ‘twin peaks’ model of Australia and the Netherlands, with one regulator handling consumer issues such as product sales and the other prudential supervision. Would that come with damn fine coffee?