Central Banking 2020: Ahead of the curve

The pressing questions facing central banks

Central banks are scanning a new and uncertain landscape. Many commentators believe that the era of one policy objective – inflation targeting – and one tool – interest rates – is over. And their operational independence, which took such work to cement during the ‘Great Moderation’ that preceded the financial crisis, has been severely questioned by the nature of the crisis interventions. So where do central banks go from here?

There are many challenges that central banks face, however for now we pose two fundamental questions that central banks and their key stakeholders will need to address if they’re to successfully address the challenges through to 2020 and beyond.The answers will reshape central bank agendas and determine both the success of their policies and their relevance within societies and economies in transformation:

1. What is your role in the management of the economy, and what are the key measures of success?

2. How can you keep pace with the rapid transformation in societies, economies, communications and the systemic risks this generates?

Meeting the rising bar of expectation

Developed market central banks have employed a range of stimuli measures to sustain economic growth since 2008. But what began as temporary expedients are beginning to acquire an air of permanence. The destabilising impact of these measures has been keenly felt in developing markets that were less affected by the crisis, making this an issue for central bankers globally. How can central banks successfully navigate through these uncharted waters and how will the responses shape their nature and policies through to 2020 and beyond?

New normal, new challenges: Central banks need to not just adapt to changing conditions, but anticipate the shifts ahead and how they’re going to change the playing field for monetary policy and financial stability.

Living in the new normal: The immediate central banking challenge presented by this new normal is how to balance the eventual unwinding of monetary stimulus with the need to sustain growth and reduce the risks of market instability that could follow such a move.

The rising bar of expectations: Central banks face an increased burden of expectation as a result of the financial crisis.

Monetary and financial stability: Macro-prudential tools can target the root causes of regulation allowed imbalances within specific sectors or lending practices, mitigating the build-up of systemic risks that threaten the financial system as a whole.

New tools, new powers: The renewed emphasis on macro-prudential regulation has armed central banks with powerful new tools. However, to deliver financial stability in a world that is now so financially interconnected poses fresh challenges.

Strengthening influence and legitimacy: Cutting across all the issues is central banks’ power to act with authority and independence. While this has always been a challenge, the renewed focus on financial stability and powers that come within have increased the risk of politicisation.

Media-savvy: Communication has become as important as financial monitoring and management to effective central bank operations. If done well, communication can strengthen understanding of central bank objectives, help shape the market mood and provide reassurance in times of stress.

Strengthening risk management: A key element of credibility is sustaining a resilient and robust balance sheet, even when it is expanding. Central banks will need to ensure their risk function keeps pace with new types of risk they face during the course of their operations.

The shift in macro-economic policy frameworks

Charting the relationship between GDP and credit growth

Seeing the future

In a world being reshaped by new technology and shifts in the focus of investment and growth, central banks face the collective challenge of how to oversee the rapid expansion of the global financial system and the establishment of new transmission channels, platforms and currencies. It is therefore vital that they develop the rapid monitoring and response to manage activities across the financial system.

As central banks look towards 2020, we think their existing capabilities will be increasingly tested and they will need to develop some new ones. We foresee a number of tensions in the road ahead through which the capable central bank will need to navigate. One such tension will come from a central bank’s competing role in deepening capital markets and maintaining financial stability. Deep and liquid capital markets help to improve the monetary policy transmission mechanism, increase public and private access to long-term finance and widen participation in the economy. In this respect, we highlight the strong correlation between GDP per head and private credit.

Managing the different scenarios of change

Given the regulatory reform that is still sweeping through the banking sector, it is tempting to see regulation as the key determinant of the industry’s future shape. However, there are much more fundamental forces at work than regulation, ranging from the significant shifts in technology, change in public expectations, and the pressure to stay ahead of the migration of ‘banking’ activities beyond the traditional banking sector.

Building on these observations, we’ve formulated three hypotheses, which we outline in this report:

Hypothesis 1: A future in which core banking services are delivered outside of the regulated banking industry

Hypothesis 2: Banks still have advantages but – to be part of the future – they need to invest heavily, rediscover and reassert their core role in society, and secure the ongoing support of policymakers

Hypothesis 3: Regulators and regulation need a radical re-orientation, realigning from policing to protecting and with public policy shifting its focus – to some extent – from institutions to markets and services.

"Central banks will have an important role to play in facilitating the public debate over what society wants from the banking system. Under this scenario regulators and central banks need to draw the regulatory strands back together and make regulation manageable for the firms they oversee."

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Carol Devenny


Tel: +1 613 755 4366

Marcus Laithwaite


Tel: +61 (2) 8266 8087

Thomas Magill


Tel: +27 (11) 797 5410

Kurtis Babczenko

Global Banking and Capital Markets Leader, and US Finance Transformation Leader, PwC United States

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