Financial independence and price stability in the ESCB

The idea that central banks should always be sufficiently capitalised is the fundamental aspect of the financial independence doctrine. This doctrine emanates from the principle of central bank independence which prohibits central banks from seeking or taking instructions from Union institutions or governments when fulfilling their ESCB tasks. The doctrine thus imposes constraints to the relation of central banks with their capitalising institutions to prevent situations in which the mandate of the ESCB could be impaired due to pressures from the latter. Financial independence operates then as a safeguard to the ESCB mandate. Yet, this ancillary nature of financial independence vis-à-vis price stability does not prevent the existence of tensions since monetary policy operations involve a degree of financial risk. This paper revisits the way in which this tension has been explained and refines it in view of the specific features of the institutional/financial framework of the ESCB.