March 2022 issue contents
Central Bank Independence and Systemic Risk

Alin Marius Andries,a,b Anca Maria Podpiera,c and Nicu Sprinceana


We investigate the relationship of central bank independence and banks' systemic risk measures. Our results support the case for central bank independence, revealing that central bank independence has a robust, negative, and significant impact on the contribution and exposure of banks to systemic risk. Moreover, the impact of central bank independence is similar for the stand-alone risk of individual banks. Secondarily, we study how the central bank independence affects the impact of selected institutional, country, and banking system indicators on these systemic measures. The results show that there might be trade-offs between central bank independence and a central bank's financial stability mandate and that central bank independence may exacerbate the effect of a crisis on the contribution of banks to systemic risk, hence the need for a coordinated interaction between central banks and the governments. We also find that an increase in central bank independence can ameliorate the effects of environments characterized by a low level of financial freedom or high market power that, by themselves, enhance the systemic risk contribution of banks.

JEL Codes: G21, E58, G28.

Full article (PDF, 50 pages)

Online appendix (PDF, 20 pages)

Alexandru Ioan Cuza University of Iasi
Institute for Economic Forecasting, Romanian Academy
World Bank