Christina Skinner on the Financial Stability Oversight Council and Central Bank Independence

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

Central bank independence was built for price stability but has expanded to cover crisis-era functions it doesn't justify.

Independence was developed to insulate monetary policy, which affects the value of money, from political interference, and it has rich economic and legal support for that purpose. Central banks then took on new powers after successive crises (2008, the euro area crisis, COVID), and independence became attached to those functions too, so it became the answer to everything. Skinner argues the result is an amorphous, supercharged version of independence that she does not think we should want, and that the book aims to force a conversation about what independence should cover.

“Central bank independence was developed for a very specific problem. ... But then central bank independence sort of became the answer to everything.”at 41:07

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

Fed's supervision, payments, emergency lending and QE are quasi-fiscal and need executive-branch oversight.

Skinner says supervision, payments, emergency lending and balance-sheet policy such as quantitative easing are fiscal or quasi-fiscal in nature and fall outside both the economic justification for independence (time consistency) and the legal one. She argues the time-consistency case does not translate to supervision and regulation. Those functions should therefore come with executive-branch coordination and oversight. Her Andy Levin paper pointed to shortcomings in congressional oversight of Fed QE, particularly the QE4 program. Her core question is whether there is the right accountability mechanism, not whether central banks should act in crises.

“But there are a number of things that the Fed does that I would say are either fiscal or certainly quasi fiscal in nature, which would imply the need for greater executive branch coordination or oversight.”at 44:49

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

Fed independence rests on Congress's Article I power over money's value, not on the overturned 1935 case.

Skinner argues that the constitutional justification for US central bank independence comes from the Article I provision giving Congress exclusive responsibility to regulate the value of money. Framers knew European monarchs had manipulated currency value for wars and other ends. Congress can delegate that monetary piece to the Fed, which is why the monetary function is independent. The older independence narrative came from a 1935 Supreme Court case that has since been overruled. Administrative agencies belong in the executive branch because they exist to help the executive ensure laws are executed, so the Fed's other, executive-character functions should not get the same protection.

“the constitutional justification for central bank independence in America comes from the Article I provision that says it's Congress's exclusive responsibility to regulate the value of money.”at 46:41

David Beckworth · Mercatus Center at George Mason University

The Fed's large footprint is driven by global dollar system demands for swap lines and money market facilities.

Beckworth argues one reason the Fed has grown so large is the demands of the global dollar system. The Fed almost has to step in to offer currency swap lines and money market facilities, which raises questions about its role. He presents this as a reason the Fed is different from other central banks and has a harder time staying within a narrow independence framework.

“I think one reason the Fed has gotten so big is because there's these demands of the global dollar system. Like, it almost has to step in and offer currency swap lines.”at 47:58

David Beckworth · Mercatus Center at George Mason University

The Fed's independence depends on democratic accountability; without it, a future government could curtail it.

Beckworth agrees with Skinner that the Fed's quasi-fiscal activities need democratic accountability. He argues that if the Fed does not deal with that, it will undermine its own independence. Once the central bank becomes politicized, the other side of politics will come to power and try to tear it down. So the Fed's independence depends on proper democratic accountability.

“If you don't deal with that, you're gonna undermine your own independence. ... So the Fed's own independence depends upon having proper democratic accountability.”at 55:31

David Beckworth · Mercatus Center at George Mason University

The ECB is effectively making fiscal transfers across member states through low rates, unlike other central banks.

Beckworth says the ECB is unique because it is a currency union without a fiscal union, spanning multiple countries. It has been given a lot of responsibility, and some would argue it is effectively doing fiscal transfers across member states by keeping rates low. He presents this as a reason the ECB, like the Fed, faces demands that make the narrow time-inconsistency case for independence hard to apply.

“The ECB is also very unique because it's a currency union, not a fiscal union, multiple countries. So it's been really given a lot of responsibility to some would argue it's ... effectively doing fiscal transfers across states via ... keeping rates low and such.”at 47:58

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

Central bank independence varies by jurisdiction; Bank of England's treasury override powers don't make it less independent.

Skinner compares the Bank of England with the Fed. The UK chancellor writes annually to the governor with the government's view on financial stability and monetary policy, and the government holds statutory powers of direction, which can override independent central bank decisions through the Treasury. Those powers have never been used. Read out of context they look very different from US arrangements, yet no one would say the Bank of England is less independent than the Fed. Her point is that independence comes in different versions because central banks play different roles in different societies. Some principles hold everywhere: a central bank should not become a central planner, and monetary policy independence must be protected to preserve the rule of law and confidence in currency and sovereign debt.

“Granted, they've never been used to anyone's knowledge, but on the books, are various ways that the government acting through the treasury can override independent central bank decisions. ... But no one, I don't think, would say the Bank of England is less independent than the Fed”at 50:24

David Beckworth · Mercatus Center at George Mason University

Smaller central banks like the Riksbank can more easily preserve independence than the Fed or ECB.

Beckworth describes the Riksbank, which after QE losses set up a deposit facility at the central bank. Some banks must hold deposits there earning 0% until the bank's profit recapitalizes it, which avoids going back to the government and questioning its independence. He thinks the Riksbank can address the independence question more easily than larger banks because it has fewer distractions. That makes it a privilege that is easier for a smaller central bank than for the ECB or the Fed. He suggests the time-inconsistency argument may be easier to satisfy in some countries than others.

“they're able to think about that issue, I think, more easily because they don't have all the distractions... it's also a privilege, or it's easier for you to do that than say maybe the ECB or the Fed.”at 51:45

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

The GENIUS Act overlaps with financial stability, so regulators still need a shared definition of stability for stablecoins.

She calls the GENIUS Act a strong piece of legislation, but says many of its areas intersect with financial stability. She argues there is still work to do on what financial stability means for stablecoins and on how financial regulators should coalesce around that understanding within the GENIUS framework. She expects this to develop over the coming year. She also states Treasury is not skeptical of stablecoins.

“the Genius Act does have a lot of areas that intersect with financial stability, so there is still work to be done in terms of thinking about what financial stability means in the context of stablecoins,”at 2:23

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

A retail CBDC is constitutionally unacceptable for the US Fed, though other jurisdictions may differ.

Skinner says a Fed retail central bank digital currency is constitutionally unacceptable in the US, so it should not be considered. She adds that other jurisdictions feel differently for different reasons, so the answer depends on context. She says this as an example of how central bank roles and tools hit differently across societies. She presents it as a settled constraint rather than a detailed legal analysis.

“But in The United States, I mean, it's constitutionally unacceptable for us to consider the Fed having a retail CBDC, but other jurisdictions feel differently for different reasons.”at 53:17

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

FSOC's nonbank systemic designation power is a flawed, overly binary tool and should be a last resort.

She says she arrived at Treasury believing 'financial stability' had become an amorphous term that enabled constitutionally inappropriate discretion at bank regulatory agencies. She also held that the designation power was a flawed tool because it is too binary. Under both the first Trump administration and the current one, Treasury agreed designation should be a tool of last resort and not FSOC's primary purpose, which led to a realignment of the council's work.

“I had also, as I mentioned before, come in with a view that the designation power was a flawed tool, was too binary,”at 13:09

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

Growth and financial stability are not competing goals; growth strengthens financial system resilience, so regulators must weigh growth costs.

She argues that the global financial stability community fell into a false trade-off in which choosing growth and innovation was assumed to cost stability. She cites a strong analytical, historical and empirical case that growth supports resilience. In a growing economy, firms and households have stronger balance sheets, debt shrinks relative to earnings, and the system can absorb shocks. Her view is that macroprudential policy was too precautionary, lacked cost-benefit analysis, and ignored how regulation's costs to credit and investment can itself threaten financial stability. She frames FSOC's new approach around this idea.

“the global financial stability community had a little bit fallen into this false paradigm or false choice, if you will, that choosing growth, choosing innovation would come at the cost of stability. And that was just the wrong way of thinking. Growth, there's a very strong analytical, historic, empirical case that growth supports resilience.”at 14:05

David Beckworth · Mercatus Center at George Mason University

Stabilizing nominal dollar incomes during the pandemic averted a financial crisis, though policy then overshot into high inflation.

He argues that if nominal income growth is stabilized, borrowers can meet dollar debts fairly easily, which is what he thinks happened during the pandemic. He points out that the economy collapsed sharply but recovered without the massive financial crisis that could have followed. He credits the stabilization of dollar incomes for this outcome. He adds that policy then overdid it, producing high inflation, so the lesson is about stabilizing income growth while avoiding overshooting.

“I think one of the stories of the pandemic is we did not have a massive financial crisis, and we should have. ... part of it is we stabilized dollar incomes. Now we overdid it.”at 15:58

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

AI is not a financial stability risk as long as the US stays ahead of China in the AI race.

Asked whether AI should be treated as a financial stability risk, she says no, provided the US remains ahead in the AI race. She calls American tech leadership in AI imperative for securing stability and says this should be coordinated with allies. The host notes China may be six months to a year behind and possibly closing the gap, and she agrees the race is central to US policy. She stresses governance standards as the other piece that lets firms adopt AI safely.

“as long as we can, a, sort of remain ahead in the AI race. You know, The United States has to Yeah. Go in the AI race. That is absolutely imperative if we want to secure stability.”at 30:28

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

AI will be a structural economic transformation like the railroad, a major boon for growth and human flourishing.

She argues that AI is poised to bring a structural transformation of the economy, comparable to the railroad. She notes that historically such transformations have amplified human flourishing, unlocking opportunity in people's everyday lives and their intellectual and physical enrichment. She concludes AI will be a boon for growth and humanity, provided the US stays ahead in the technology race and firms adopt governance principles. The view is a long-run one and rests on historical analogy rather than near-term data.

“AI is poised to work a structural transformation of the economy just like the railroad did.”at 31:34

Christina Parajon Skinner · The Wharton School, University of Pennsylvania

Supervisors should evolve expectations so banks can compete and adopt AI, even rewarding AI fraud and cyber detection.

She argues that FSOC should keep working with agencies to adopt AI themselves and to set a supervisory posture toward AI. If the goal is for regulated firms to compete in AI and adopt it responsibly, supervisory expectations must change. Her example is awarding positive supervisory credit for using AI to detect fraud or cyber intrusions, rather than supervising only for risk. She describes this as a needed alignment that is already underway.

“Because if we want our firms competing in AI, responsibly adopting AI, right, then the supervisory expectations need to evolve.”at 33:53