Mugur Isărescu: The future of central banking Address by Mr Mugur Isărescu, Governor of the National Bank of Romania, during the plenary session “The future of central banking”, 8th World Policy Conference, Montreux, 20 November 2015. *  *  *  Parts of this address have been presented by Governor Mugur Isărescu during the plenary session “The future of central banking”, which also featured as speakers: •  Jean-Claude Trichet – former President of the European Central Bank  •  Jacob Frenkel – Chairman of JPMorgan Chase International, former Governor of the Bank of Israel  •  Marek Belka – President of the National Bank of Poland  Ladies and gentlemen, It is a great honour to address the audience during this symposium on the future of central banking, although I must confess from the very beginning that the topic itself is not easy to tackle. We all know that economists seldom reach a consensus when analysing the past. It is all the more difficult for them to agree on the future, especially when we refer to central bankers, who are known to be among the most cautious economists... Personally, I think I have enough reasons to be wary of any predictions of what is in store for us, particularly over the medium and long term. I started my career as an economist in a research institute back in August 1971, when the Bretton Woods System was just collapsing.
But what Lorie and I wanted to highlight was that, while Covid itself may have been truly exceptional, the financial market propagation mechanisms that turned that shock into a nascent systemic liquidity crisis reflected more structural trends: an increasing reliance by the real economy on core capital markets rather than banks; constraints on market intermediation capacity; and a range of unresolved vulnerabilities in non-bank firms that played an ever-growing role in those markets. In short, even if nothing as awful as Covid ever happened again, market dysfunction at a scale capable of threatening systemic stability could recur – and in all likelihood, would do so. And central banks needed to be ready to play their part. Our working group did not seek to provide a single definitive ‘playbook’ for such events – the range of potential shocks, and different national market and institutional structures, made that impossible. But it did set out a framework of principles and possible tool choices. [2] And that framework proved invaluable at the Bank of England when, late last year, vulnerabilities in Liability Driven Investment (LDI) funds amplified the impact of an abrupt change in fiscal stance into a selfreinforcing spiral in government bond prices. Long maturity nominal gilt yields rose by 130 basis points in a matter of days – three times the size of any comparable historical move – and we were  Page 3  required to intervene to safeguard financial stability.