The role of central banks in financial stability: How has it changed?
Willem Buiter, 16 January 2012
The global crisis inaugurated a new era for central banks in the advanced economies, when their conventional role as interest rate-setters and lenders and market makers of last resort expanded. Central banks have become the custodians of stability for financial markets – a role for which they lack both democratic accountability and political legitimacy, argues Willem Buiter in DP8780. He decries the new “perverse division of labour” between central banks and fiscal authorities and appeals for a reassessment of this pathological arrangement.
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Topics: EU institutions, Financial markets, Global crisis, Global economy, Institutions and economics, Macroeconomic policy, Monetary policy, Politics and economics
Tags: accountability, Central Banks, financial stability, global crisis, unorthodox monetary policy
Coordinating bank-failure costs and financial stability
Iman van Lelyveld, Marco Spaltro, 27 October 2011
The dissent brewing throughout Europe hinges on the question of whether the financial burdens of the Eurozone crisis should be shared between weak and strong. This column presents a new paper arguing that the wealthier, more stable economies don’t have much choice.
During the financial crisis, failure or distress of cross-border firms has been met by ad hoc coordinated solutions (eg Fortis and Dexia) or national solutions (eg UK and US banks).
Topics: Europe's nations and regions, Global crisis, International finance
Tags: bank resolution, burden-sharing, cross-border banking, Eurozone crisis, financial stability
Rethinking central banking
Barry Eichengreen, Eswar Prasad, Raghuram Rajan, 20 September 2011
Central banks have massively broadened their remit in recent crisis-laden years, but the standard analytic framework – ‘flexible inflation targeting’ – has not changed. This column argues that it is time to properly flesh out an alternative framework. Financial stability should be an explicit mandate of central banks, and international coordination among central banks should be boosted by forming a small group of systemically significant central banks that regularly meets and issues reports to the G20 on their financial-stability policies.
In the wake of the global financial crisis, there is an emerging consensus that the framework underpinning modern central banking – known as flexible inflation targeting – needs to be rethought.
Topics: Monetary policy
Tags: central banking, financial stability, flexible inflation targeting
Monetary policy and excessive bank risk taking
Itai Agur, Maria Demertzis, 13 January 2011
What institutions should be responsible for financial stability? Do governments need distinct regulators for distinct objectives or should central banks pursue both price stability and financial stability? This column argues that monetary policy inevitably will involve considerations of financial stability due to its effects on banks' risk taking and says that central banks should embrace this dual role.
Disclaimer: The views expressed in this article are those of the authors only, and do not reflect the views of De Nederlandsche Bank or of its Board.
Topics: Monetary policy
Tags: financial stability, Leaning against the wind
The impact of banking sector stability on the real economy
Pierre Monnin, Terhi Jokipii, 7 October 2010
Does banking sector instability damage the real economy? Or the other way round? This column presents data from 18 OECD countries between 1980 and 2008. It finds that banking sector stability appears to be an important driver of GDP growth in subsequent quarters. It argues that monetary policy should therefore pay more attention to banking sector soundness.
At the November 2008 meeting of the G20, just two months after the collapse of Lehman Brothers, the need for regulatory reform had already been clearly established.
Topics: Financial markets, Global crisis
Tags: business cycle, financial regulation, financial stability
The “other” imbalance and the financial crisis
Ricardo Caballero, 14 January 2010
Global imbalances have been suggested as the root cause of the global crisis. This column argues that another imbalance is the guilty party. The entire world had an insatiable demand for safe debt instruments that put an enormous pressure on the US financial system and its incentives. This structural problem can be alleviated if governments around the world explicitly absorb a larger share of the systemic risk.
One of the main economic villains before this crisis was the presence of large “global imbalances”, which refer to the massive and persistent current account deficits experienced by the US and financed by the periphery. The IMF, then in a desperate search for a new mandate that would justify its existence, had singled out these imbalances as a paramount risk for the global economy.
Topics: Global crisis
Tags: financial stability, global crisis, global imbalances
Securitisation and financial stability
Hyun Song Shin, 18 March 2009
Did securitisation disperse risks? This column argues that it undermined financial stability by concentrating risk. Securitisation allowed banks to leverage up in tranquil times while concentrating risks in the banking system by inducing banks and other financial intermediaries to buy each other’s securities with borrowed money.
Financial booms and busts are as old as finance itself, but the current global financial crisis has the distinction of being the first post-securitisation crisis. Securitisation refers to banks’ practice of parcelling and selling loans to other investors.
Topics: Global crisis
Tags: financial stability, global crisis debate, risk, securitisation
Reforms of the world financial system: Can the G20 deliver?
Luigi Spaventa, 28 January 2009
To fix the world financial system, the G20 needs to look at some bold institutional reforms. The column suggests an international financial stability charter backed up by an new institution that could either be ‘light’ with a slim secretariat, or more elaborate WTO-style organisation.
In these hard times, with banks collapsing by the week and the arteries of credit clogged in spite of government interventions of unprecedented size and nature, drafting blueprints of reform of the financial system may seem an unnecessary distraction from more pressing challenges. It is not so.
Topics: Global governance
Tags: financial regulation, financial stability, G20
Is globalisation risky?
Roland Spahr, 18 November 2008
Globally integrated countries have suffered heavily from highly volatile stock markets during the current crisis. This column argues that globalised countries enjoy lower stock market risk in good times, but they suffer just as much in crises. Moreover, the transition to openness breeds financial instability. Policymakers need ways to manage these risk concerns.
In recent years, evidence has suggested that globalisation is a key driver in helping emerging economies to apply knowledge, regulations, and standards acquired from their Western counterparts in order to become more mature, reliable, and hence stable.1 Pazarbaşıoğlu et al.
Topics: Global economy
Tags: financial stability, globalisation, risk
Central banks’ function to maintain financial stability: An uncompleted task
Charles A.E. Goodhart, 24 June 2008
Central banks cannot achieve price and financial stability with one instrument (interest rates). A counter-cyclical regulatory system is needed to dampen asset booms and to smooth busting bubbles. To use such macro-prudential instruments effectively, regulators need courage, quantitative triggers, and independence; they will be criticised by lenders, borrowers and politicians in both booms and busts.
The events of the last year have reminded us all that a central bank does not just have one responsibility, that of achieving price stability. It is indeed its first core purpose (CP1); but as the sole institution that can create cash, and hence bank reserve balances, a central bank has a responsibility for acting as the lender of last resort and maintaining financial stability.
Topics: Financial markets, Monetary policy
Tags: Central Banks, financial stability, interest rates, price stability