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2016 | Book

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Central Bank Regulation and the Financial Crisis

A Comparative Analysis

Author: Miao Han

Publisher: Palgrave Macmillan UK

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

The respective legal frameworks that control central banks are shaped by whether they are market oriented or government controlled. However such stark distinction between these two categories has been challenged in view of the varying styles of crisis management demonstrated by different central banks during the crisis. This book uses comparative analysis to investigate how the global financial crisis challenged the role played by central banks in maintaining financial stability. Focusing on four central banks including the US Federal Reserve System, the Bank of England, the Bank of Japan and the People's Bank of China, it illustrates the similarities between the banks prior to the crisis, and their similar policy responses in the wake of the crisis. It demonstrates how each operated with varying levels of independence while performing very differently and facing different tasks. The book identifies some central explanatory variables for this behavior, addressing the mismatch of similar risk management solutions and varying outcomes. Central Bank Regulation and The Financial Crisis: A Comparative Analysis explores the legal challenges within central bank regulation presented by the global financial crisis. It emphasizes the importance of, and the limitations involved in, legal order and argue that in spite of integration and globalization, significant differences exist in central banks' approaches to risk management and financial stability.

Table of Contents

Frontmatter

Introduction

1. Introduction
Abstract
The first central bank was established in Sweden in 1668, and since then most countries, whether developed or developing, have set up their own central banks.1 The inception of central banks has often been linked with certain tasks delegated to them by their governments, but the role of those banks in stabilising financial markets has been far from clear. This conundrum — how central banks contribute to financial stability — has come under the spotlight again because of the far-reaching effects of the global financial crisis (GFC). Through the mechanism of a comparative study, this book will examine how the GFC has challenged the role played by central banks in maintaining financial stability; it argues that this crisis has, amongst other things, changed central bank regulation2 to strike an improved balance between government and the market.
Miao Han

Theoretical Framework

Frontmatter
2. Central Banks’ Two-Tier Relationships
Abstract
During their long developmental history, central banks have made important changes, but their definition as both the government’s banker and the bankers’ bank is rarely questioned.1 As explained by the BOE:
The Bank’s roles and functions have evolved and changed over its three-hundred year history. Since its foundation, it has been the Government’s banker and, since the late 18th century, it has been banker to the banking system more generally — the bankers’ bank.2
Miao Han
3. The Global Financial Crisis: The Challenge for Central Banks
Abstract
The previous chapter established that central banks have important roles to play in maintaining financial stability, and statutes have stipulated facilities which enable them to fulfil their purposes and their functions of ensuring monetary stability and managing systemic risk. Their regulation is therefore closely linked with the actuality and/or threat of financial crisis: central banks combine monetary policy instruments and crisis management solutions to deal with market instability. The GFC highlighted major issues relevant to central bank regulation among others. Central banks were blamed for both causing and not ably responding to the financial crisis, particularly with respect to their financial stability agenda and objectives. Since 2007, they have carried out massive global monetary expansion, which will now be reviewed; meanwhile, they have been targeted for fundamental reforms, moving towards financial stability. As a result of, and compiling data about, my central research questions, this chapter will explore whether, and if so how, central banks have managed to change in order to work towards and achieve financial stability.
Miao Han

Case Studies

Frontmatter
4. US Federal Reserve System and the Global Financial Crisis
Abstract
As stated in Chapter 1, the market or government orientation of a central bank can be approached from its legal framework, which deals with its two-tier relationship; these were, however, challenged by the GFC. This chapter will demonstrate that the US Fed was a market-oriented central bank with consolidated prudential regulation, until the GFC changed its commitment to market principles.
Miao Han
5. Bank of England and the Global Financial Crisis
Abstract
Like the US Fed, the Bank of England (BOE) was, under its legal framework, required to be a market-oriented central bank and lender of last resort in the event of financial crises; prudential regulation was distributed between it and another independent agency. But its two-tier relationship was challenged by its method of crisis management selected during the GFC. This chapter will explain how its market-oriented commitment was changed as a result.
Miao Han
6. Bank of Japan and the Global Financial Crisis
Abstract
As the first central bank outside the Europe, the Bank of Japan (BOJ) was established in 1882, and then politically controlled for over a century. So, unlike the market-oriented US Fed and BOE, the BOJ is perceived as a government-guided central bank conducting limited financial regulation and supervision.
Miao Han
7. From Centrally Planned Economy to Market-Oriented Principles: The People’s Bank of China under Change
Abstract
The People’s Bank of China (PBC), established on 1 January 1948, is the youngest of the four central banks selected here. This chapter will first review its two-tier relationship under change during China’s market-oriented reform before assessing its crisis management solutions during the GFC.
Miao Han
8. People’s Bank of China and the Global Financial Crisis: Policy Responses and Beyond
Abstract
The previous chapter defined the PBC as a government-owned central bank in China’s market-oriented reform. Political domination is, at the time of writing, its predominant characteristic, affecting its relationships with government and with the market. In this context, the bank was challenged by the spillovers from the GFC from late 2008, but China regained significant GDP growth a year later. This chapter will provide an overall assessment of central bank crisis management by the PBC, demonstrating that it is a proactive financial regulator under the direct control of the government.
Miao Han

Comparative Analysis

Frontmatter
9. Central Bank Regulation toward Financial Stability: Convergence, Divergence, or Multiple Pathways? Evidence from the Comparative Study
Abstract
The key propositions of this research, relating as they do to the market or government orientations of central banks, have been successively considered in Chapters 4–8. These dealt respectively with four selected central banks, namely: the US Fed, the BOE, the BOJ and the PBC. The main themes were addressed by reference to these case studies. It is clear that the GFC has challenged the ability of the existing central bank regulation to maintain financial stability. This chapter will now identify the leading signs of convergence or divergence and the multiple pathways in the character and conduct of these central banks’ approaches to facilitating systemic stability.
Miao Han
10. Conclusion
Abstract
The GFC has been judged as the worst financial crisis since the 1930s Great Depression, prompting profound reforms at both national and international levels. The foregoing analysis has detailed how it has challenged the capacity of four leading central banks to deal with financial risk, and necessitated further reforms. Drawing upon country-selected case studies, the following observations will conclude the arguments of this study.
Miao Han
Backmatter
Metadata
Title
Central Bank Regulation and the Financial Crisis
Author
Miao Han
Copyright Year
2016
Publisher
Palgrave Macmillan UK
Electronic ISBN
978-1-137-56308-8
Print ISBN
978-1-349-55548-2
DOI
https://doi.org/10.1007/978-1-137-56308-8