Money market freezes and central banks
Max Bruche, Javier Suarez 07 January 2011
During the global crisis central banks have undertaken unconventional measures that some commentators claim go beyond their mandate. This column focuses on central banks intervening in the money markets as a middle man. It argues that such actions can be welfare improving, but are unlikely to be fiscally neutral, thus raising questions about whether they should be left to a central bank.
During the peak of the crisis in autumn 2008, spreads in money markets rose sharply and volumes contracted, forcing many banks into difficulties with their standard liquidity management and refinancing strategies. Central banks reacted by taking deposits from some banks (via deposit facilities and excess reserve accounts) and lending directly to other banks (via various lending facilities) at much larger scale than in normal times.
Global crisis Monetary policy
monetary policy, Central Banks
Sense and nonsense in the quantitative easing debate
John H Cochrane 07 December 2010
Last month, the US Federal Reserve announced a new quantitative easing programme, in which it will inject money into the economy by buying up to $600 billion in long-term government bonds. This column argues that now is not the time to be buying back long-term debt. Given exceptionally low long-term rates, the US government should be <i>issuing</i> it instead.
In November, the Fed started its new “quantitative easing programme”. The Fed will buy up to $600 billion in long-term government bonds, putting $600 billion of extra money in the economy. Defenders think this is the key to reducing unemployment and breaking the economy out of its doldrums. Though the Fed's motives were initially unclear, Chairman Ben Bernanke's 5 December interview on CBS 60 minutes made it clear that fighting unemployment is a crucial motivation.
US, monetary policy, Central Banks
Governments, central bankers, and banking supervision reforms: Does independence matter?
Lucia Dalla Pellegrina, Donato Masciandaro, Rosaria Vega Pansini 12 September 2010
The global crisis has led policymakers in the EU and the US to broaden their central banks' mandates to include greater banking supervision. This column argues that this new responsibility should be seen as an evolution of the central bank specialisation as a monetary agent rather than a reversal of the specialisation trend.
In response to the global crisis, many countries are implementing – or at least considering – reforms concerning the role of the central bank in banking supervisory regimes.
- On July 2010 US President Barack Obama signed into law the so-called Dodd-Frank Act.
The Dodd-Frank Act increases the role of the Fed as a banking supervisor. This is despite the fact that during the discussion of the bill US lawmakers debated whether to restrict some of the Fed’s regulatory responsibilities.
Global governance Monetary policy
monetary policy, Central Banks, financial regulation, global governance
Strengthening the financial system: The benefits outweigh the costs
Stephen Cecchetti, Benjamin H Cohen 20 August 2010
The extent of the damage from the global crisis has forced policymakers to rethink how they regulate finance. This column first examines the long-term impact of stronger capital and liquidity requirements and then estimates the transitional economic impact as the new standards are phased in. It argues that, while such reforms may come at a short-term cost, the benefits of a stronger and healthier financial system will be around for years to come.
Just like an overweight victim recovering from a severe heart attack, the financial system must change its ways. After working tirelessly – and in the end successfully – to stabilise the patient, the world’s central bankers and supervisors are developing a rigorous diet and exercise programme to help avoid a relapse. Yet, now that the immediate danger has passed, a natural scepticism has set in. Does the financial system really need to change its ways? Why bother with all this unpleasant exercise? Are the benefits of more stringent regulation and supervision really worth the cost?
Financial markets Global crisis
Central Banks, financial regulation, global crisis
The low-interest-rate trap
Francesco Giavazzi, Alberto Giovannini 19 July 2010
Should the crisis spur central banks to change how they conduct monetary policy? This column argues that strict inflation targeting, which ignores financial fragility, can produce interest rates that push the economy into a “low-interest-rate trap” and increase the likelihood of a financial crisis.
There is a fundamental flaw in the way central banks set official interest rates. This flaw has created what might be called the “low-interest-rate trap”. Low rates induce excessive risk taking, which increases the probability of crises, which in turn, requires low interest rates to keep the financial system alive. The flaw behind all this is the failure of central banks to take account of the probability of financial crises when setting interest rates.
Global crisis Monetary policy
interest rates, inflation targeting, monetary policy, Central Banks, global crisis
We must escape the grip of short-term funding
Enrico Perotti 05 July 2010
This column argues that government measures to restore confidence in the financial system have achieved a “pause in the panic”, but this is not enough. Governments still need to reverse the dramatic slide of the financial system towards unstable funding – a trend that holds a gun to the heads of governments and central banks.
Last week, the banks won but financial stability lost. Heavy lobbying undermined G20 support for proposals by the Basel Committee to plug a major gap in banking regulation. Measures such as “liquidity buffers” were challenged. Yet these are the sort necessary to contain “liquidity risk” – the inability of financial institutions to refinance their positions in times of distress. This failure was a major flaw in the international policy framework known as Basel II.
Central Banks, financial regulation, Short-term bank funding
Double targeting for Central Banks with two instruments: Interest rates and aggregate bank equity
Hans Gersbach 01 February 2010
Should monetary policy and banking regulation be conducted by separate bodies? This column proposes a new policy framework whereby the central bank chooses short-term interest rates and the aggregate equity ratio while banking regulation and supervision, including the determination of bank-specific capital requirements, would be left to separate bank-regulatory authorities.
The current crisis has placed a fundamental question at the centre of policy discussion: “Should monetary policy and banking regulation be conducted separately?” Opinions differ – see Adrian and Shin (2009), Goodhart (2008), and De Larosière et al. (2009).
Central Banks, financial regulation, equity ratio
Liquidity in the financial crisis: New insights on the lender of last resort
Pierre-Olivier Weill, Guillaume Rocheteau, Ricardo Lagos 16 December 2009
Following the last run on a British bank over 130 years ago, Walter Bagehot argued that central banks should act as a lender of last resort. While such policies have been followed by central banks in today’s crisis, this column updates the recommendation by suggesting central banks should also act as a “liquidity provider of last resort”.
Under every central banker’s bed is a copy of “Lombard Street” by Walter Bagehot. Published in 1873, it argues that the central bank should act as a lender of last resort during crises to ensure that financial intermediaries have the resources to provide liquidity in asset markets. The name comes from the London base of Overend, Gurney and Company who in 1866 were the subject of the last run on a British bank before Northern Rock in 2007.
Central Banks, Federal Reserve, global crisis, ponetary policy
Adjustments to the accountability and transparency of the European Central Bank
Sylvester Eijffinger 24 October 2009
Governments are restructuring their financial supervision systems. This column warns that the proposed new structure for European financial supervision is poorly coordinated and will not help in a systemic crisis. It discusses how the ECB might coordinate macro-prudential supervision in the euro area.
It is widely agreed that central banking should not be subject to "political business cycles". Consequently, in the last decades, it has become an integral part of modern central banking policy that full operational (or functional) independence of central banks is a welfare-enhancing quality. However, the objectives of the central bank should then be clearly defined from the outset, the bank should be accountable for its actions, and the public should have a solid trust in its actions. The ongoing crisis may well have made central banking more complicated.
ECB, Central Banks, financial supervision
The global crisis and central banks in Latin America: Breaking with the past
Luis I. Jácome H. 20 October 2009
Latin American central banks seem to have weathered the global crisis quite well. This column describes their policy responses and says they succeeded in lowering inflation, averting banking crises, and shortening the recession. It attributes their success to past reforms that created strong institutional foundations and effective policy frameworks.
Latin America has a history of recurrent financial crises that took a large toll on economic growth and fuelled social unrest. Frequently, these crises were triggered by exogenous shocks, which unveiled macroeconomic and/or financial weaknesses, leading to simultaneous banking and currency crises. Financial crises, thus, became a primary source of macroeconomic instability and a reason for social frustration, as vast groups of the population, in particular the poorest, often lost their jobs, real income, and savings.
Central Banks, banking crises, global crisis