Central Banking’s new award for capacity building honours those public servants who have worked to improve central banks in challenging circumstances. The inaugural winner of this award is a man who not only has worked to develop capacity at central banks in more than 20 countries, but actually helped found some of them.
Warren Coats had taken a PhD in economics from the University of Chicago after his undergraduate degree at the University of California, Berkeley. After teaching for five years at the University of Virginia, he joined the International Monetary Fund in 1976, and became chief of the finance department’s Special Drawing Rights division in 1983. A former colleague refers to him as being intimately involved in the work that went into the introduction of SDR.
He had already led a distinguished career when, in the early 1990s, it took a new turn – the republics of the Soviet Union gained their independence. Coats was one of the first officials the IMF sent to help these new countries set up functioning central banks and run their own economies.
Former Soviet republics
He led IMF technical assistance missions to Bulgaria in 1992, and, in subsequent years, played the same role in Kyrgyzstan, Kazakhstan and Moldova. Early on, he discovered that things that he had taken for granted in market economies were simply lacking in much of the former Soviet bloc.
Newly independent central banks in countries that had been part of the Soviet Union faced particularly tough problems. “The central bank buildings were there, the people were there,” Coats tells Central Banking. “But they had been branches of Gosbank, the Soviet Union’s central bank, rather than operating as independent central banks.”
The new republics needed to build the institutions of capitalism, including decentralised payment systems. All the state-owned firms in the former Soviet republics paid their employees in cash, and everything else was done as part of a budget for a centrally planned economy. All major cross-border transactions had to be routed through Moscow.
“In the non-centrally planned world, payment systems worked well enough that we never had to pay attention to how they were organised and how they functioned,” says Coats. In the ex-Soviet republics, that wasn’t an option.
The IMF missions had to call on experts from institutions such as the Federal Reserve Bank of Richmond to work “at a nuts-and-bolts level”. They helped the local authorities move from the highly centralised Soviet arrangements to depositor-based national payment systems.
In each of the former Soviet republics, IMF staff had to help the newly independent central banks determine what they should be doing, and how they should do it. They needed to think through basic principles.
“One thing Warren Coats did was to prepare a list of basic central banking activities,” says IMF consulting expert Åke Lönnberg, who worked with Coats on many technical assistance missions. “And then to consider how these functions could be implemented on a case-by-case basis in countries that typically lacked trained personnel or the tradition of having an autonomous and accountable central bank.”
The missions led by Coats worked with the authorities to translate these principles into laws. From 1994 to 1996, he led six missions to the former Soviet republic of Moldova. “There was nothing in their central bank law that really dealt with monetary policy,” says Coats.
Before we had all the Basel principles, Warren was talking to the central banks about how the banks should be regulated, and who should do it
Åke Lönnberg, IMF consulting expert
IMF lawyer Henry Schiffman worked with Coats to draft a law setting out the Moldovan central bank’s monetary policy objectives and tools. “I think it was the first law that had these provisions in one place with a monetary policy objective,” Coats tells Central Banking.
The Moldovan governor and the speaker of the parliament presented Coats with a specially bound copy of the law, with a dedication calling him its “chief architect”. Coats says: “I don’t think there’s anything I treasure more.”
The teams that he led also began thinking about how laws should establish a proper balance between central bank independence and accountability. They drafted laws giving mandates to central banks, establishing to whom they should report, and how central bank governors could be appointed or removed. Each new law allowed them to further refine the principles, says Coats.
Another crucial area in many emerging economies was banking supervision. Coats had not been a supervision specialist, says Lönnberg. But he applied himself to thinking through the basic principles, and to helping emerging economies put them into practice. “Before we had all the Basel principles, Warren was talking to the central banks about how the banks should be regulated, and who should do it,” Lönnberg tells Central Banking.
The missions also required great diplomacy, especially when Coats began working in countries rebuilding themselves after conflict. One of the most challenging of these was in Bosnia, where Coats began working in 1995, shortly after armed intervention by Nato powers ended a bloody civil war.
The Dayton Peace Agreement, in an article that Coats helped draft, ordered the warring Bosniak, Croat and Serb communities to form a single central bank. “And that was no easy thing, because they had inflicted more damage on each other than anything I saw anywhere else in Europe,” says Coats.
The political leaders of the three communities were “trying to get away with a lot” as the central bank law was drafted, Coats remembers: “They didn’t get away with much.” It took over a year to get the central bank law drafted and passed. A New Zealander, Peter Nicholls, was installed as the bank’s governor for the first six years after the war, and was grateful for Coats’s support.
Coats then worked on establishing a central bank in Kosovo after it gained de facto independence from Serbia after the war of 1999. He also led the team that set up the Palestine Monetary Authority, involving delicate negotiations with the Palestinian and Israeli authorities.
Coats participated in the first IMF mission that went to Afghanistan after the fall of the Taliban, in January 2002. He returned several times, as part of a consultancy team that trained and mentored Afghan central bankers.
“I loved these kids – wonderful people who wanted to raise their country up from what it had become,” he says. Many are now senior officials in the central bank, he says, although others have been forced to flee the country.
He retired from the IMF as assistant director of the monetary and capital markets department in May 2003. He was then a director of the Cayman Islands Monetary Authority from 2003 to 2010, and carried on undertaking consultancy tasks for central banks in the developing world.
Some of the advisory missions have been more successful than others. Coats worked to strengthen the central bank in the newly independent South Sudan, and has been saddened to see the country’s return to war.
Coats also worked in Iraq after the overthrow of the Saddam Hussein regime. There, he was shocked by the level of infighting between different US organisations and saw efforts to resolve failing banks frustrated by the powerful Chalabi family.
Nevertheless, many of the missions Coats has led have helped economies facing enormous difficulties to develop increasingly competent central banks.
Missions such as these must deal with a wide range of central banking areas, says Lönnberg: “In some missions I’ve been on with Warren, we concentrated on the basic legal framework for the financial sector – the central bank law and the commercial banking law. Often, the advice and assistance dealt with issues related to monetary policy and monetary implementation or the national currency.”
They often had to deal with payment systems development, or with central bank governance and organisation. As an economist, Coats has a great breadth and depth of knowledge, says Lönnberg.
These missions required technical knowledge of a wide range of economic problems. But they also demanded other qualities: leadership, humility, determination and tact.
Warren Coats’s greatness is that he covers all the bases
Åke Lönnberg, IMF consulting expert
“Coats has a tremendous patience, which has served him well,” notes Lönnberg. “In addition, he has an eminent ability to make his points in a very clear way, greatly facilitating the communication with the authorities.”
“The knowledge that we have is only background,” says Coats. “The key thing is to understand what system is in place, and what the political and cultural attitudes are. My strongest advice would be not to think that you can helicopter in and deliver a blueprint.”
As Lönnberg says: “Warren Coats’s greatness is that he covers all the bases.”
The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Joel Clark, William Towning and Tristan Carlyle