IMF economist warns central banks may grow too powerful

The roles of major central banks, including the U.S. Federal Reserve, European Central Bank and Bank of England, have been extended in the wake of the banking-turned-debt crisis, to include banking supervision and stand-back financial oversight.

Speaking in a panel discussion at the London School of Economics, Blanchard said there were good reasons to put monetary policy and bank supervision powers under the same roof as banks learned the lessons of the financial crisis.

But he suggested there could be problems with putting too much influence into the hands of unelected technocrats.

"If you think now of central banks as having this much larger set of responsibilities and this much larger set of tools, then the issue of central bank independence becomes much more difficult," Blanchard said.

"Do you actually want to give an independent central bank the right to choose loan-to-value ratios without any supervision from the political process. Isn't this going to lead to a democratic deficit in a way where a central bank becomes too powerful?"

Speaking at the same event, U.S. Federal Reserve Chairman Ben Bernanke said it was important that central banks considered risks in the financial system when conducting policy, noting the huge impact that credit in housing markets had on the economy.

"I don't think you can completely separate central banking and financial regulation," he said during the panel discussion.

But Axel Weber, a former head of Germany's central bank, said he was concerned that central banks might be distracted from their core mission by their broader roles.

"There is a potential problem of stretching the remit of central banks into areas where basically the overall monetary policy ... focus of central banks could get lost," said Weber, who is now chairman of Swiss bank UBS.

(Reporting by Marc Jones, Marius Zaharia and William Schomberg; Editing by Michael Roddy)