National central banks should remain strongly involved in the prudential supervision of banks within their countries, according to the governing council of the European Central Bank (ECB). This case is strengthened by changes that will be triggered by the introduction of the euro, it argued.

Stating that it had assessed the involvement of central banks in prudential supervision following the recent debate on the reorganisation of supervisory structures in some euro states, the ECB said it had decided to make its position public "for reasons of transparency".

The ECB outlined the planned Irish change as the creation of a single financial regulator within a re-structured Central Bank. Other euro states where changes are proposed include Germany, where the Minister for Finance has announced a new federal authority separate from the central bank for the supervision of banking, and Belgium, where the supervisory role of the central bank has been reinforced.

The ECB set out three main arguments in favour of combining prudential supervision with central banking:

information related synergies between supervision and core central banking functions - because of the importance of confidential information collected for prudential supervision of individual intermediaries or institutions for macro-prudential analysis;

focus on systemic risk due to the close relationship between prudential control of individual intermediaries and the assessment of risks for the financial system as a whole; and

independence and technical expertise, because central banks are "recognised as sources of excellent research and analysis on the banking and financial system" and because they are independent of political interference.

Arguments for separation included the potential for conflicts of interest between supervision and monetary policy, the possible blurring of distinctions between financial products and intermediaries, and the need to avoid excessive concentration of power in the central bank.

But the ECB said arguments in favour of separation of prudential supervision and central banking "lose their force" and those against gain when the introduction of the euro is considered.

"An institutional framework in which the euro system's responsibilities for monetary policy in the euro area are coupled with extensive supervisory responsibilities of national central banks in domestic markets, and with reinforced co-operation at an area-wide level, would seem appropriate to tackle the changes triggered by the introduction of the euro," according to the ECB.