No certitudes in bank regulation

In today's BS, Shankar Acharya has an article that shows how the certitudes underlying bank regulation in industrial economies have been shaken by recent events. The certitudes were:

first, a nation’s central bank should be accorded statutory independence from government; second, the central bank should be charged with the single (or primary) target of keeping inflation low; and third, all financial trading and intermediaries should be brought under a separate single regulator.

Following the collapse of Northern Rock in UK, the Bank of England could not fend off pressures from government to effect a rescue of depositors. This was after all the tough talk from Bank of England Governor Mervyn King. So much for central bank independence.

As for focusing on inflation alone, the US Fed found itself obliged to cut interest rates in order to maintain financial stability. As for having a single regulator, Acharya rightly points out that there cannot be a uniform prescription for all contexts- you have to see what will work in a given context.

Acharya has some kind words to say about the criticism that RBI has attracted for its efforts to contain rupee appreciation:

Against this background it should be easier to sympathise with the Indian authorities’ recent and somewhat untidy efforts to grapple with the unprecedented surge in foreign capital inflows and their destabilising consequences. The shrill and simplistic critiques of over-zealous “market fundamentalists” are not very helpful. Nor, of course, is blind defence of any and all public regulatory interventions.