Transparency of Central Banks

Until about twenty years ago, central banks were traditionally closed institutions that released only a very small number of strictly dosed information to the public. With the diversification and globalization of financial markets, the demand for information has multiplied. The number of financial institutions is constantly growing, and with the increase in prosperity, the number of individuals who place part of their assets on financial markets is also rising, and the development of the Internet has enabled everyone unhindered access to information, reports the Bosnian news agency Patria.

In such an environment, it was necessary for central banks to increase the transparency of their operations from traditionally closed institutions, which was significantly influenced by inflation targeting in some central banks, leading to an increased level of communication between the public and the central bank. An insufficient level of transparency can lead to doubts about whether the central bank is conducting policy in the public interest. In a large number of countries, freedom of information laws are in force, which prevent central banks from maintaining secrecy in their work and hiding documents and information.

International financial institutions define the transparency of central banks as an environment in which policy goals (legal, institutional, monetary policy framework, decisions and reasons for their adoption, data and information related to monetary and financial policy) are presented to the public in an understandable and timely manner.

Greater transparency in the operations of a monetary institution can help in the more efficient implementation of monetary policy. Informing the public about the mandate of the central bank and the extent to which it has been achieved can increase the credibility of the central bank. Strict adherence to the principles of transparency in operations requires a kind of self-discipline from monetary policy makers and increases the likelihood of conducting consistent monetary policy. Likewise, regular communication provides guidance to financial markets, enabling financial market participants to better understand monetary policy measures and their impact on economic trends and systemic shocks.

On the other hand, the monetary authority should influence the expectations of market participants, as this will make it easier to achieve its goals. Four important areas can be identified where greater or lesser communication with the public is significant:

- The first area is the goals of monetary and economic policy,
- The second area relates to the macroeconomic environment in which these goals need to be achieved,
- The third area is the instruments of monetary policy by which the goals are to be achieved (as well as their application and limitations), 
- The fourth area relates to central bank forecasts.

Transparency does not jeopardize the independence of the central bank. International financial institutions hold the view that transparency of central banks can play a strong role in preventing the occurrence of crisis situations. The only exception regarding the limitation of transparency is possible cases where it poses a danger to market stability, especially if it could lead to the emergence of moral hazard, disruption of market discipline, and financial stability.

The transparency of the work of monetary institutions does not only mean the placement of information, but the presentation of information in such a way that it can be correctly understood by the public. Therefore, central banks generally give priority to a visual approach, i.e., well-made charts that clearly indicate the situation and prospects, with shorter texts. Practice has confirmed that the public does not show interest in large, detailed, and complicated texts written on a professional basis. Likewise, it is necessary to take into account that monetary policy is implemented in a complex, uncertain, and constantly changing environment. Today, central banks publish standardized publications such as: annual business reports, monetary and statistical bulletins, financial stability reports, price movement reports, etc.

It is common practice, supported by legal solutions, for central banks to submit an annual business report to the relevant political institutions, most often the parliament or government, which contains not only financial statements but also reports showing the overall monetary policy. To increase credibility, most central banks engage eminent external auditors to audit financial statements and their operations.

A large number of central banks have developed communication strategies and established special public relations departments - PR departments. The goal of communication strategies is to ensure public understanding and support for the measures implemented by the central bank and to increase the efficiency of monetary policy instruments by reducing uncertainty about the central bank's goals and intentions. An integral part of the communication strategy is an adequate and timely response to information published in the media that is not in line with the policy, goals, and instruments of the central bank's monetary policy, or is simply untrue and incorrect.

There is a close connection between the issue of transparency and the issue of accountability. The concept of accountability, in fact, represents the responsibility of the central bank towards the public, as well as the willingness to explain the measures and actions taken. Accountability has three important characteristics: decision-making on the most important goals, transparency of monetary policy, and ultimate responsibility for monetary policy.

The accountability of the central bank can be determined through three determinants: the clarity and precision with which the goals of monetary policy are presented and explained to the public, the degree to which decisions are communicated to the public and meet the stated goals, and the degree to which the central bank is obliged to explain past decisions.

The counterbalance to the defined independence of the central bank is its accountability and transparency in operations. This implies the creation of appropriate institutional arrangements that enable conditions for effective control of the central bank by the public and holders of other forms of government, primarily the parliament.

Respecting the requirements of transparency standards, and following the development of technology, central banks have long introduced the practice of publishing their financial statements, annual reports, chief economist reports, monthly balance sheets, statistical and other publications on the Internet on their websites, so that their financial and other reports have become publicly available data. Thus, the Central Bank of Bosnia and Herzegovina has also paid due attention to transparency, which has not gone unnoticed in international circles dealing with central banking. As an example, it can be mentioned that in the specialized journal „Central Banking Journal“ published in London, in one of the issues from 2004, an interesting study was published on compliance with transparency in the financial reports of central banks, as well as their timely publication on the Internet, and also the publication of monthly balance sheets, in which the Central Bank of Bosnia and Herzegovina was ranked among the 16 most transparent central banks in the world according to the stated criteria.

Transparency leads to public trust in the operations of central banks, and enables various users-experts to produce various studies on the operations, activities, and practices of world central banking as a specific activity.