Central Banks: New Stakeholders of Human Rights
By: India Fox
In the years following the proclamation of the UN’s Declaration of Human rights in 1948, it was generally assumed the declaration was addressed primarily to governments, whose duty it was to enshrine human rights into constitution and law. As a consequence, some think a division of responsibility was created between the public and the private sector. The private sector assumed primary responsibility for maximising wealth for the benefit of its owners or stakeholders, while the public sector accepted responsibility for enforcing respect for human rights[1]. But in more recent years, as globalisation has increased exponentially, multi-national corporations have outgrown their governmental watchdogs and undergone surmounting pressure to not only avoid violating human rights but to protect and promote them.
However, this divide between public and private is too simple. For it is hardly the case that public corporations were united and uniform in this effort to implement human rights, especially those financial institutions, specifically central banks, whose language and philosophy are more or less identical to their private counterparts. On the contrary, central banks have dodged the bullet of scrutiny in the human rights debate, which has been laid so heavily upon MNCs. The ‘science’ of central banks is founded upon ‘econometric models and highly technical rules of financial regulation’; their analysis focuses on the ‘aggregate macroeconomic level and statistical economic indicators.’ This all seems a far cry from the qualitative measures of human rights advocates, who tend to focus on ‘individuals or community right-holders’ [2]. But irrespective of strategy and analysis, the reality is that central banks, through policy setting and regulatory role, have an immense impact on people’s human rights and living standards. In other words, central banks are the new stakeholders of human rights.
But before we leap into how central banks impact upon human rights, it is first necessary to break down what we mean when we talk of rights and how this translates into correlative duty. Only then can we comprehend why central banks ought to promote human rights and how they are neglecting this duty.
Understanding Rights
Rights are commonly considered to be entitlements that an agent possesses: to do or not do certain actions, or to be or not be in certain states. Alternatively, they are safeguards that prohibit others from performing or not performing actions upon an agent[3]. But in order to properly understand rights, we must find a systemic way to categorise them. A generally accepted model is the Hohfeldian system, which categorises rights into four main groups: privilege, claim, power and immunity.
The Four Categories of Rights
An example of a privilege right is the right to take a walk in the public park or meet a friend for coffee: ‘A has a privilege to φ if and only if A has no duty not to do φ’ [4]. To say that you have a right to take a walk in the public park is to say that you do not have a duty not to walk in the public park.
A claim right might be a contract between an employer and employee, which confers upon the employee the right to freedom from harassment in the workplace: ‘A has a claim that B φ if and only if B has a duty to A to φ’ [5]. The employee has a claim that she not be harassed in the workplace, so the employer has a duty to prevent harassment. So we can see that every claim right correlates to a duty. Some claim rights correlate to duties in more than one agent: an agent’s right not to be enslaved correlates to a duty in every person not to enslave her. This example also demonstrates how some claim rights create a duty to refrain from performing actions.
Privilege and claim rights define what Hart called ‘primary rules’: rules requiring that people perform or refrain from performing particular actions[6]. The ‘secondary rules’ consist of rights which specify how agents can change primary rules. These ‘secondary rules’ are power and immunity rights. A has a power right if and only if A has the ability to alter her own or another’s privilege/claim right. A schoolteacher has the power right to silence a noisy class. The teacher’s exercise of this power changes the students’ normative situation: it imposes a new duty upon the students (to be silent) and withdraws their privilege right (to talk). Similarly, a promisor exercises a power right to make a promise. Accordingly, the promisee has gained a claim-right to whatever the promisor has promised.
So when ‘A has the ability to alter B’s privilege/claim right, then A has a power right’. Conversely, ‘when A lacks the ability to alter B’s privilege/claim right, then B has an immunity right: B has immunity if and only if A lacks the ability to alter B’s claim/privilege rights.’[7] For example, an employer lacks the ability to enslave his employees. So his employees have an immunity right not to be enslaved.
The four categories of rights work together. For example, your privilege right to practice any religion you wish corresponds to the claim right against others forcing you to practice a certain religion. If someone does not have power over your choice of religion, you have an immunity right to practice whichever religion you choose. If someone does not have power over your choice of religion, then they do not have the claim right to choose your religion.
The Hohfeldian system provides us with a clear and simple way to categorise rights, which shall be particularly useful when we try to apply it to the complex world of finance. However, this system does not produce a perfect and complete list of rights, which may act as a kind of checklist for institutions to adhere to. Rather, we will use the Hohfelidan system to identify why central banks are permitted to act and why, in accordance to this liberty, it is their duty to uphold the rights of those they impact.
Central Banks and their Mandates
We shall begin by considering central bank mandates, which set out in law their activities and aims. Though they may vary from country to country, they generally focus on ‘inflation, price stability and… monetary policy’. They might also include ‘promoting full employment, financial sector supervision, oversight of financial stability and… promoting financial inclusion’[8]. So central banks can be said to have a power right, in that they are able to set out mandates which consequently impact upon the privilege or claim rights of individuals or companies to whom the mandate applies. This power right obviously has its limitations: a central bank is not able to set mandates outside the financial sphere and even within that sphere, we intuitively hold immunity rights against inappropriate or corrupt conduct.
Central bank mandates are also integrally linked with economic stability, living standards and employment rates. But policy blunders can ‘destroy wealth and contribute to creating financial-economic crises, which lead to job losses, inflation and have adverse effects on people’s standard of living and access to basic goods’[9]. In other words, the mishaps of central banks can devastate the environment in which people’s privilege and claim rights –the right to decent living standards, the right to basic goods, etc.- may be fulfilled.
Central banks need to recognise the implications of their power right. The UNEP suggests that central banks must include in their policy deliberation an analysis of the impact of their policy on the rights of all societal groups and an assessment of how violations may be mitigated. For example, monetary policy committees could publish information on how they weighted the expected consequences of an interest rate (e.g., on pensioners, mortgage holders, savers). Certain central banks, such as the Bank of England, already publish this kind of analysis, but the rights aspect is swamped by economic terminology. A more explicit approach could help communicate impacts to the government so that they may prepare adequately. For example, a rate rise, which the central bank considers necessary to fight inflation, could push households with high levels of consumer debt into financial difficulty. Therefore, the government can expect a rise in the number of households seeking social assistance and prepare for the increased demand[10].
Monetary Policy Role
It is a near impossible task to manage monetary policy in such a way that all societal groups are equally benefited. As a compromise, central banks must make trade-offs between the impacts of different rate decisions on different groups. By minimising violation of immunity rights, central banks may have a clearer strategy in making these trade-offs. To achieve this, it would be necessary to assess the expected impacts of different rate decisions on different societal groups in comparison to their current economic climate, mitigating disproportionately negative effects upon a particularly vulnerable group. Policies would thereby be born not out of aggregated statistics but out of individuals and their situations.
Never did the plight for human rights speak so loudly in monetary policy deliberations as they did during the 2008 Financial Crisis. The crisis led to the ‘most prolonged period of ultra-low interest rates in history in the major economies, coupled with quantitative easing which has massively expanded central bank balance sheets and pumped huge amounts of liquidity into the global finance system’[11]. As a result, global inequality was more apparent than ever and was a wake-up call for many central banks to hold some responsibility: Yves Mersch, a member of the Board of the European Central Bank noted that ‘until relatively recently, such consequences (the distributional impacts of policy) have largely been ignored in the theory and practice of monetary policy. … Central banks are not charged with the task of addressing inequalities in the distribution of wealth, income or consumption- nor are they dealing with the broader challenge of promoting economic justice for society as a whole. … But particularly at a time of exceptionally low interest rates and non-standard monetary policy measures, it is essential for us to be aware of all collateral effects- including distributional ones, i.e. the potential economic damage to some parts of society’[12].
This willingness of central banks in large economies to consider the distributional implications of monetary policy promises hope for talk of human rights within policy deliberations. An increasingly unequal society is unlikely to remain a sustainable one; hence a focus on the distributional impacts of policy with a human rights emphasis could be part of the answer.
Financial Sector Supervision Role
Depending on their mandate, some central banks have the power right to supervise and regulate the financial sector. But just as in monetary policy, central banks often fail to consider how a financial institution impacts upon the claim and privilege rights of a vulnerable group. For example, the abuse of individual rights by mortgage fraud, particularly in the subprime market, was widespread during the financial boom and could have indicated a growing problem to regulators. Some government agencies in the US tried to raise the issues as early as 2004[13], but financial regulators, such as the Federal Reserve, dismissed these warnings, focusing instead on aggregate metrics and new credit risk models[14].
Awareness of immunity right violations in the financial sector, through means such as ‘financial misconduct, mis-selling scandals or failures to act in the best interest of customers or by broad market dynamics’, could help to alert regulators to emerging problems before they become systemic. Therefore, a central bank’s role in financial supervision and stability could benefit from awareness of impacts upon human rights as ‘an additional indicator of imbalances, emerging risks and unsustainable financial practices’[15].
Some central banks have already taken the initial steps of including human rights and social risks in their supervisory role. The Nigerian Central bank was an early leader with the development of the Nigerian Sustainable Banking Principles in 2012[16], in addition to ‘a commitment to delivering positive development impacts to society while protecting the communities and environment in which financial institutions and their clients operate’. The principles include a specific principle on human rights: “ Principle 3| Human Rights- We will respect human rights in our Business Operations and Business Activities”, as well as other related principles on women’s equality and financial inclusion. The Central Bank has required implementation by all banks, discount houses and development finance institutions by developing strategies to manage environmental, social and human rights risks. Supervision works primarily on regular mandatory reports.
Conclusion
Traditionally, central banks have recoiled from talk of human rights and the duties that come with them. And yet, any action they conduct can be framed in the language of rights: every permissible action is based off a power right. Indeed, central banks have an almost uncountable number of power rights, of which we have considered only three, and with each comes the limit of people’s immunity rights. It is therefore the duty of central banks to integrate human rights at the forefront of deliberation and abandon this illusion that they are above such discussion. Moreover, it is their duty to not only avoids violating immunity rights but to fairly promote the privilege and claim rights of all.
The urgency to recognise these duties has become increasingly apparent over the past few months. The tragic death of George Floyd has forced the world to recognise and confront the racism that is engrained into every aspect of society. Albeit a late one, the Black Lives Matter Campaign has served as a wake up call, one that even Central Banks cannot ignore. The Federal Reserve Bank of Atlanta recently issued a statement, which accepted ‘an important role in helping to reduce racial inequalities and bring a more inclusive society’[17]. But more importantly, the Atlanta Fed has recognised the utility of its power rights in this mission: ‘through our monetary policy decisions, our role as a supervisor and regulator of banks, our support of the payments system, and our commitment to community and economic development’, by ‘promoting maximum employment’ and ‘modelling economic inclusion’, the Atlanta Fed has committed to creating an economy that ‘must work for all Americans’[18]. This, at least, is a positive step towards recreating the philosophy of central banks, one that holds rights at its core.
[1] Cragg, Wesley. “Human Rights and Business Ethics: Fashioning a New Social Contract.” SpringerLink, Springer, Dordrecht, 1 Jan. 1970, link.springer.com/chapter/10.1007/978-94-011-4311-0_20.
[2] “Human Rights and Sustainable Finance – UNEP Inquiry.” Human Rights and Sustainable Finance, Feb. 2016, p31, unepinquiry.org/wp-content/uploads/2015/10/Human_Rights_and_Sustainable_Finance.pdf.
[3] Wenar, Leif. “Rights.” Stanford Encyclopedia of Philosophy, Stanford University, 24 Feb. 2020, plato.stanford.edu/entries/rights/.
[4] Supra, see note 3
[5] Supra, see note 4
[6] Noonan, John T. “CONCEPT OF LAW. By H. L. A. Hart. Oxford: Oxford University Press, 1961. Pp. Viii, 263. 21s.” OUP Academic, Oxford University Press, 1 June 1962, academic.oup.com/ajj/article/7/1/169/213851.
[7] Supra, see note 5
[8] “Human Rights and Sustainable Finance – UNEP Inquiry.” Human Rights and Sustainable Finance, Feb. 2016, p30, unepinquiry.org/wp-content/uploads/2015/10/Human_Rights_and_Sustainable_Finance.pdf.
[9] Supra, see note 2
[10] Supra, see note 9
[11] Human Rights and Sustainable Finance – UNEP Inquiry.” Human Rights and Sustainable Finance, Feb. 2016, p33, unepinquiry.org/wp-content/uploads/2015/10/Human_Rights_and_Sustainable_Finance.pdf.
[12] Mersch, Y. “Monetary Policy and Economic Inequality”. Keynote Speech by Yves Mersch, Member of the Executive Board of the European Central Bank, at the Corporate Credit Conference, Zurich, 17 October 2014
[13] “Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States” Financial Crisis Inquiry Commission, Financial Crisis Inquiry Report:, Public Affairs, New York, 2011, pp.67-102.
[14] “Human Rights and Sustainable Finance – UNEP Inquiry.” Human Rights and Sustainable Finance, Feb. 2016, p35, unepinquiry.org/wp-content/uploads/2015/10/Human_Rights_and_Sustainable_Finance.pdf.
[15] Supra See note 13
[16]“Nigerian SustainableBanking Principles ” Https://Www.cbn.gov.ng/, www.cbn.gov.ng/Out/2012/CCD/Circular-NSBP.pdf.
[17] Bostic, Raphael. “A Moral and Economic Imperative to End Racism.” Federal Reserve Bank of Atlanta, 2020, www.frbatlanta.org/about/feature/2020/06/12/bostic-a-moral-and-economic-imperative-to-end-racism.
[18] Supra, See note 17