7 enduring ingredients to shape 'Central Banking of Tomorrow'

The Context

Central Banks (CBs) are strategic organizations managing ‘value’ in its entirety - creation, stability, preservation, growth, risk management, access, inclusion, innovation et al. The buck, literally, stops with them.

For far too long, traditional aspects such as currency management, payment system handling, lender of last resort, money supply, government banking have been the main stay. These are a given.

In recent times, enhanced strategic mandate/objectives, challenging economic conditions, evolution of technology, participant proliferation (volume and nature), among others, have rapidly reshaped the expectations from CBs. CBs are expected play doer, enforcer, innovator, enabler, orchestrator ‘roles’, all at once, across current and emerging spaces. This requires an exhaustive and integrated approach, beyond siloed and limited lens of the past.

The Approach

A 'Central Bank of Tomorrow', needs to chart a calibrated course to steer the future, depending on its mandate, coverage and composition. Here are 7 enduring capability themes, that can help a Central Bank seamlessly bridge today with tomorrow.

Irrespective of the current positioning, CBs need to plan, prepare and 'execute' along these lines:?

1.????? Direct: The capability to regulate constituents. This is upended by extended participants -perimeter and/or tiered. This necessitates CBs to go beyond broad brushing and nurture a calibrated approach to supervision. Increasingly, this also means addressing scale based oversight, regulatory arbitrage (check imbalances via level playing field). Select CBs are using their regulatory powers to direct exemptions and/or incentives to realize targeted outcomes.

2.????? Diagnose: The capability to monitor and measure constituents - across outputs and outcomes. Diagnosis encompasses participants, economy, policy impact and much more. The ability to 'listen' is more layered (noise/signal, symptom) than simple 'returns' submitted by participants. The need for standardization (formats), real time interaction, automation (machine readable, executable) and forecasting, is driving significant change under this capability.

3.????? Do: This capability refers to CB’s operating national systems such as for cash handling, payments e.g. RTGS, card scheme, real time payments, among others. Increasingly, CB’s are developing and providing enablement / engagement ‘utilities’ such as for data handling. Key question is to define the 'mix' of retention, addition and devolution of capabilities to participants, FMI operators etc.

4.????? Develop: This capability refers to providing ongoing support to defined /existing agenda. Typical coverage includes areas such as financial literacy, enabling non-cash payments acceptance infrastructure in far flung areas, upgrade cycle of existing capabilities. The primary pivot is to go beyond addressing reachable majority to be more inclusive, finetuned and even be the 'first adopter' in some capabilities, paving the way for a safer financial services landscape.

5.????? Drive: This capability refers to focused development and delivery of initiatives that are a must for the nation. The Covid-19 pandemic and the crises of past 30 years have placed more and more responsibilities on CBs. National vision, whether branded or not, places specific demands on CBs. CBs need to shape capabilities that support their unique place and position in global and regional financial services structure. It requires a CB to incubate, oversee, incentivize, devolve/divest national capabilities in areas such as lending, fraud management. In enabling certain segments that are strategic for tomorrow, but have limited near term commercial viability, CBs take a enterprising role. CBs also need to embed sustainability goals and measures into it policy and actions. As such, ‘Drive’ capabilities are more forward looking and strategic in nature vis-à-vis ‘Develop’.

6.????? Distance: CBs must engage national capabilities and shape an integrated approach. This often includes, eGovernment systems, non-financial entities such as Telecom, innovation drivers, among others. While CBs have a national mandate, increasingly they must seek more regional and global engagement in a fast and connected world. Extended group includes other central banks, multi-lateral development banks, International payment networks etc. This must go beyond currency peg (aligned monetary policy), managing currency flows for remittance and trade. While the need to walk the extra distance to supervise/govern multi-jurisdiction players and address ‘interconnectedness’ is a given, there is a need to evolve solutions through both bilateral and multi-lateral engagement. Recent CBDC projects, illustrate this trend.

7.????? Dialogue: The capability that strings it all together CBs must embrace two-way communication with a range of stakeholders. One way communication is a relic of the past. Consistent, iterative and multi-forum engagement is key along all the six ‘D’ lifecycles stated above.

Way forward

CBs need to:

§? Understand the interlinkages and interdependencies between the 7 capability themes

§? Prioritize initiatives on the basis of point of departure (i.e. current state) and key objectives.

§? Orchestrate portfolio, program, project management to support the choice of initiative 'mix'?

§? Realign operating and technology model to support process, people and platform (IT) dimensions

§? Institute KPIs to measure progress and keep the feedback loop working (internally and externally)

?In summary, Central Banks that drive an integrated approach to tomorrow, will become the ‘Leader of the First Resort’.

PS : Specific references towards named technology or business initiatives such as Sandbox, Open banking, CBDC, Stablecoin, SupTech, RegTech, XBRL/SDMX - have been avoided intentionally to focus on direction.