DEVELOPMENT OF CENTRAL BANKING IN THE EUROPEAN SYSTEM OF CENTRAL BANKS: CASE OF LATVIJAS BANKA

Abstract

This paper discusses the development of central banking in the circumstances of the European Common Market, globalised banking industry and financial market complexity. Central banks make up an essential part of the financial sector. The establishment of the European Central Bank (ECB), the formation of the European System of Central Banks (ESCB) in 1998 and the enlargement of the European Union (EU) on 1 May 2004 as well as on 1 January 2007 was a turning point for the EU national central banks (NCBs). The process of the EU enlargement was accompanied by the formation of some groups of the NCBs: the NCBs of the old EU countries (EU15) and the NCBs of the new EU Member States (EU12). The analysis of the performance indicators of a number of the NCBs points to substantial differences between the given groups of the NCBs and there are good opportunities for promoting the integrity of the ESCB. Following the centralisation of a part of the decision-making process, the effectiveness and efficiency of the NCBs were questioned.
Specific development circumstances in each country have determined the mode of operation and the place of the central bank in the financial environment. At the same time in the context of financial market globalisation and turbulences, the central banks are subject to financial risks. The paper pursues the aim to propose solutions for further improvements in the ESCB’s operation and policy. In the pursuit of the objectives set, the authors have made use of such methods as the statistical analysis of indicators, and the graphic and monographic approach. The authors build their research on the analysis of operational results of the NCBs and views of a number of researchers on various aspects of modern central banking. Some differences have been detected for several indicators of central banks of the EU15 and EU12 countries; they prove that there is still room for improving the integration, effectiveness and efficiency of the ESCB. The findings of the research suggest that there exists a closer relationship between the NCB performance indicators in the EU12 and EU15 countries and that the integration process is gaining momentum. The indicators characterising operational efficiency of Latvijas Banka become more aligned with those of the other NCBs, however the differences still remain. The innovative aspect of this paper lies in finding trends for the performance indicators and policy developments of the EU12 countries’ NCBs. The development of an NCB rating system and the analysis of rating position of the NCBs of the Baltic States in the period between 1999 and 2007 are among the novelties of the research.