Assigning Financial Stability Role to Central Banks: The Case of Bank of Sierra Leone

Abstract

After the great financial crisis of 2007/8 and its contagious effects on economies across the world, many countries including Sierra Leone began focusing more attention on their financial systems stability. The key question for policy makers was which institution could be best assigned the financial stability role, given the current institutional arrangement? This paper attempts to present a clear case on why the Bank of Sierra Leone was best suited for financial stability role as enshrined in the Bank of Sierra Leone Act 2019 and the level of framework necessary for the effective execution of this new objective. In addition, Calvo <i>et al</i> (2018) revealed that of the jurisdictions surveyed, 78 percent allocated financial stability responsibility solely to their central banks, and increasing number of jurisdictions have dedicated inter-agency committee in which the central bank plays an important role. Interestingly, for the case of the West African Monetary Zone (WAMZ) region, the central banks are solely responsible for financial stability and prudential guidelines. From the analysis, we also discovered that while the current institutional arrangement may not be sufficiently adequate for sound financial stability implementation, the process of developing a strong financial stability framework was at an advanced stage. The study thus concludes that assigning this role to the Bank of Sierra Leone was the right move as it was already charged with banks’ prudential guidelines and no other institution in Sierra Leone was better placed for it. The study therefore recommends the need for more financial sector reforms to mitigate risks emanating from financial imbalances and destabilising interaction among various key markets, payment and financial institutions.