A Latvian challenge for the European Central Bank

Published on Thursday, 22 February 2018 21:29
Written by Bloomberg View

A scandal in Latvia is raising questions about the European Central Bank’s ability to do its job. The details remain murky, but the ECB should move swiftly to reassure investors that its high standards will be upheld throughout the euro zone.

A report by the U.S. Treasury has alleged widespread money laundering at ABLV Bank AS, one of Latvia’s largest lenders. Separately, over the weekend, Latvia’s anti-corruption agency detained Ilmars Rimsevics, governor of the country’s central bank and a member of the ECB’s governing council, on suspicion of securing bribes. He wasn’t charged and was released on bail. He strongly denies the allegations and says they are part of a plot to undermine him.

It’s unclear whether any of the allegations are well-founded. The story is tangled, and is further complicated by the claim that Russian misinformation is involved. Regardless, the shadow cast over Latvia’s central bank is not something the ECB can afford to ignore.

Latvia has had to contend with several banking scandals in recent years. Yet the ECB’s standing in all this isn’t straightforward. Formally, national authorities are responsible for policing money laundering. And the ECB has no formal say in the selection of central-bank governors, though they’re required to comply with the ECB’s code of conduct.

But problems in states as tiny as Latvia are capable of causing damage more widely. The ECB supervises the largest banks in the euro zone, including ABLV: Even if money laundering is mainly a matter for national governments, the financial regulator cannot plausibly detach itself. Likewise, governors of national central banks, acting collectively, set monetary policy for the entire euro zone: The reputation of the ECB’s individual policy-makers affects the reputation of the whole.

So far, the ECB has moved to prevent alarm in financial markets, and investors seem confident it can continue to do so. Otherwise, though, it has kept its head down, refraining from comment while the accusations are looked into. That won’t do. It’s right, of course, to avoid jumping to conclusions.

Posted in New Britain Herald, Editorials on Thursday, 22 February 2018 21:29. Updated: Thursday, 22 February 2018 21:32.