Ulrich Bindseil, European Central Bank (ECB)
Central Banking Before 1800 – A Rehabilitation

Usually, the Swedish central bank, founded in 1668, and the Bank of England (BoE) in 1694 are referred to as the oldest European central banks. In his Working Lunch, Ulrich Bindseil looked back at the origins of central banking, arguing against the prevailing view. Bindseil, who is Director General Market Operations at the European Central Bank (ECB), analyzed the charters of various earlier European continental institutions and examined whether these banks had a policy mandate and were based on a concept of central banking. Also the principle of lender of last resort, a key characteristic of constituting a central bank, is said to have developed only in the course of the 19th century.

According to Bindseil, however, already before 1800, more than 20 institutions fulfilled the definition of central banks. He found that the first institutions whose business model consisted in issuing central bank money with particularly short-term liabilities acting on the ground of specific policy objectives dated back to 1401 when the Taula de Canvi in Barcelona was founded, or the beginnings of several banks in the Italy, such as the Casa di San Giorgio in Genoa (1407), the Banco di Rialto in Venice (1587) or the Naples banking system (1580). Also the Hamburg Bank (1619) and the Nürnberg Bank (1621) rank among these early institutions. “Machiavelli referred to the Casa di San Georgio as a state in a state”, Bindseil explained their prominent position.

From the very beginning of central banking, lending to government is a recurring topic. The Casa di San Giorgio and the BoE both go back to the need of finding a framework for organizing the creditors of government. Based on his analysis of the pre-1800 central banks' balance sheet structure, Bindseil found that “the Bank of England from the beginning had a large loan given to the crown”. Also the Riksens Ständer Bank, the precursor institution of the Swedish Riksbank, had been financing the Swedish government during large periods of the 18th century. The first central banks were mostly established in democracies. As Bindseil further explained, there was a wide belief that central banks couldn’t be established in a monarchy with the Bank of England set aside as a constitutional monarchy.

Comparing the past with the current situation, Bindseils emphasized that the definition of eligible collaterals in the lending to private borrowers and the concept of a lender of last resort as a financial stability related function were constant topics over time. Altogether, in Bindseil’s opinion, the history of central banking goes beyond the Swedish central bank and the BoE. “If you apply these concepts then it’s hard to believe  that central banking was invented by Riksens Ständer Bank”, he concluded.

Presentation: "Central Banking Before 1800 - A Rehabilitation" (PDF, 1,7 MB)



Dr. Michael Heise, Allianz
Inflation Targeting and Financial Stability

Over the last decades, government bond yields have been falling drastically in advanced economies along with long-term interest rates. In his Working Lunch, Michael Heise, chief economist at the insurance group Allianz, scrutinized recent developments in monetary policy and suggested building a broader index of price stability.

According to Heise, the general rule of thumb that the long-term bond rate should correlate with long-term growth of GDP no longer holds true. “Monetary policy and not fundamental factors has put down interest rates”, Heise said. Looking at the negative side effects of a low-interest rate environment, Heise warned against a situation as in Japan that suffered a balance sheet recession after a financial crisis. In Japan, the accumulation of non-performing loans (NPL) inhibited banks from giving new loans and zombie firms were kept alive.

Furthermore, as a consequence of the current low-interest rate environment in the euro area, asset prices and especially housing prices have been increasing. Simultaneously, risks were building up in investors' portfolios. According to Heise, the BBB components in investment grade indices were continuously rising. “Investors are going up the risk ladder, searching for yields”, Heise said. Imbalances are also building up in the target system.

Comparing the unconventional monetary policy measures of the European Central Bank (ECB) and inflation development, Heise concluded that “inflation has its own life”. In his opinion, the ECB should define price stability targets in a more adaptable way, moving the focus away from a simple year-on-year target for consumer price inflation.

Instead of relying exclusively on the Harmonised Index of Consumer Prices (HICP), Heise suggested building a broader index which also reflects inflation expectations. Since in a financial boom risks are building up that could hit back when the economy is slowing down, the ECB should also put greater weight on developments in the financial cycle. According to Heise, “this is quite difficult and requires tough decisions but they need to be taken”.

Inflation Targeting and Financial Stability (PDF)