In response to the financial crisis, the most immediate fundamental reform adopted by several developed countries is to have a “systemic regulator” overseeing the stability of the financial system as a whole. Through data gathering, analysis and ultimately regulation, the systemic regulator is expected is expected to mitigate the risks associated with highly inter-dependent relationships between financial institutions. Many central banks are receiving significant new responsibilities for macroprudential supervision. Changes to the UK regulatory framework in 2010 gave the Bank of England responsibility for microprudential and macroprudential regulation. In the US, the Dodd-Frank Act established the Financial Stability Oversight Council, to be led by Treasury Secretary including the heads of the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
Several arguments have been put forward for justifying why central banks are receiving a prominent role in macroprudential supervision: financial supervision offer insights into the condition of financial institutions that is essential in the conduct of monetary policy; and central banks are inextricably involved in the financial stability function through their lender-of-last-resort function.
Yet assigning such a task to central banks has raised concerns and objections. Several arguments have been also put forward for opposing central banks receiving the stability mandate. First there is an innate contradiction between taking enforcement against an individual institutions (e.g. Lehman) while ensuring stability.  In my opinion the most compelling argument regards the conflict with monetary policy.  The stability mandate might at times require actions that conflict with the objective of monetary policy. There are ample examples recently where the hard but desirable decisions were kicked down the road, with added future collective costs for the economy. We witnessed recently numerous rapidly evolving situations in which there is opacity, lack of information and urgency to act. It is human nature to opt for the easy road - use the liquidity facilities of the central bank - to stop the fall. The problem is that liquidity many times covers for insolvency. In situations in which the banks have considerable real estate exposure , a central bank might be reluctant to raise rates even in the case of a potential bubble.  Finally, it may distract central banks from their core price stability task. Therefore in a previous column in this forum Masahiro Kawai and I proposed an independent organization that focuses solely on stability.
All of us work in organisations, and we know that whenever people interact in organisations, many factors come into play. In this context, it is not sufficient to deal with the theoretical pros and cons of giving central banks the stability mandate. I have probably worked for or advised more central banks than most people. I worked for the Federal Reserve, advised Bank Indonesia, Bank of Israel, and several other central banks.
After working for 22 years in and with central banks I am quite confident that central banks have certain common characteristics that go with the territory of being a central banker. In my opinion the organizational dynamics of central banks are as important as or more important than any other consideration in implementing the stability mandate. At the risk of venturing outside my sphere of competence, in this article I address the issue of organizational behavior- the culture, the networks of individuals and units and therefore power in the central banking organizations. I found that central banks have the following common characteristics:
Central banks’ dominant monetary policy role leads to the promotion of macroeconomists to senior roles. Therefore in central banks the power resides with macroeconomists. Yet as Paul Krugman writes in How Did Economists Get It So Wrong? “they’ll have to do their best to incorporate the realities of finance into macroeconomics” (New York Times, September 6, 2009). Neoclassical macroeconomic models do not have a formal financial sector built in. Given my personal experience, there is equally no doubt that investment analysts and financial economists reason differently from macroeconomists. In numerous central banking organizations the banking supervision mandate is a “distant relative” to the monetary policy core mandate and therefore neglected. The need for discretion and secrecy in conducting the banking supervision function leads as well to a “silo mentality” in which the banking supervision does not collaborate with the rest of the organization. Each profession has its own vocabulary and expressions. It leads to different perspectives and conclusions on the part of macroeconomists and banking supervisors. For instance, in the current crisis there is no doubt the microsupervisors across the world missed the “tectonic” macro overlay of the crisis, and the macroecomists were not informed of the risks. Therefore there is a distinct risk that in a seniority-based organization the financial expertise needed will be in short supply and if brought from outside may not graft well, or the expertise might be stifled due to a different lexicon.
Due to the need for careful reflection before making decisions, central banks also have very hierarchical organizations which rightfully value careful deliberation, caution and consensus. Central bank staff retention is far higher than other branches of governments, with veterans of 25 and 30 years in senior positions. This structure gives central banks a level of professionalism, dedication, and continuity, as well as an esprit de corps that is unparalleled in the rest of the civil service of many countries. However, those very attributes that makes central banks strong, leads to a conservative culture that invariably favours the status quo rather than a dynamic culture that is willing to question, and if necessary challenge the status quo. A career culture leads as well to dated experience. In the last 10 years markets have moved very fast in introducing innovations such as credit derivatives, securitisation, SIVs, and APBCs. The financial innovations were likely alien concepts in central banks.
Second, central banks favour consensus and dissenting voices are discouraged. As a result one rarely hears a dissenting different view point. Third, while the compensation structure in central banks is typically higher than the rest of the federal government, the reality is that the demand for financial experts has never been higher and the salaries in private sector jobs are considerably higher than comparable salaries for civil servants and academics. Therefore an added challenge is to get financial expertise embedded in the fabric and trust culture of central banks.
Vesting the stability mandate in central banks is not a panacea. All those reasons pose a serious challenge for central banks in the implementation of the stability mandate, and before that in their fulfilling their banking supervision mandates. Given those considerations, the stability mandate vested in central banks presents a formidable challenge. The objective of this column is not to discourage the readers and present an insurmountable task. However, central banks need to give considerable attention and effort to succeed in this task.
This article has appeared before in the   

ft.com/economistsforum
http://blogs.ft.com/economistsforum/2010/12/are-central-banks-up-to-the-stability-task/