The chapter examines recent international regulatory reforms that emphasise macroprudential principles and objectives for banking regulation and supervision. The UK provides an interesting example of a jurisdiction that has moved from a largely microprudential framework of regulation to one that combines a macroprudential framework of regulation and policy that aims to control systemic risk with judgment-based micro prudential supervision. The chapter discusses the evolving definition of banks and the necessity for law and regulation to keep pace with financial innovation and evolving market structures. The chapter argues that although UK regulatory reforms have taken important steps in coordinating macroprudential regulation and policy with microprudential regulation, challenges remain in monitoring systemic risks across the financial system and in addressing risks posed by the shadow banking system.
Kern Alexander and Rosa María Lastra
Edward F. Greene, Jeffrey M. Amico and Surya Bala
The financial sector appears to be on the verge of a significant transformation. Traditional market participants such as banks, investment advisors and institutional investors are beginning to face disruptive pressure from a wide array of advances in financial technology, or ‘fin tech’. New forms of competition have emerged, seeking to address perceived inefficiencies in various core business lines of the financial system, including lending money, raising capital and transmitting money between individuals. As this transformation plays out, regulators will need to adapt existing regulatory structures or create new ones to keep up. In particular, they must find the proper balance between protecting consumers from abuse while also allowing these new technologies to modernize and improve financial markets. This chapter focuses on three of these recent developments in closer detail: marketplace lending, crowdfunding and blockchain technology. While the applications differ, all three rely on a common model: eliminating the role of traditional intermediaries and thus enabling market participants to connect and transact with each other directly. This form of ‘dis-intermediation’ promises speed and efficiency, as processes like approving loan applications, raising capital and transferring money can now take mere seconds (or less) instead of days or weeks. At the same time, it also creates risk for consumers, as highly regulated entities such as banks stand to be replaced by software applications and peer-topeer networks that largely sit outside of existing regulatory frameworks. Regulators must carefully develop policies that maximize the benefits of these technologies for consumers while mitigating their costs.
David Bholat and Robin Darbyshire
This chapter examines the important but not often discussed issue of accounting in central banks. Central banks are not-for-profit enterprises that pursue public policy objectives. Our chapter therefore highlights the distinguishing factors that make the financial statements of central banks different to those produced by other bodies. We begin by explaining why central banks produce financial statements. We then discuss a variety of specific topics in central bank accounting. In terms of balance sheet items, we discuss banknotes, shareholders’ equity, gold, foreign exchange and financial instruments. Our discussion of the income statement then centres on profit recognition and distribution which are of significance in the relationship between the central bank and the Finance Ministry.
The author provides a critical description of the forays into unconventional monetary policy measures by the European Central Bank (ECB) and discusses the court case on the ECB’s competences on one such unconventional measure, Outright Monetary Transactions (OMT). The legal basis of the non-standard measures adopted since the beginning of the crisis, from collateral widening through negative interest, forward guidance and long-term refinancing to quantitative easing, are discussed, with a special focus on the situation for (banks in) the EU Member States whose governments have been financially supported (e.g., Greece). The author finds that the ECB’s mandate has been stretched, but not too far, in the crisis circumstances although, in normal times, the economic-policy role taken might be ultra vires. The ECB itself should assume the role of provider of Emergency Liquidity Assistance (ELA) now that banking union has given it wide-ranging prudential powers, notably over the most significant banking groups in the Euro Area.
Andrew G Haldane
There has been a huge amount of research on how human decision-making is affected by cognitive biases. There has also been a huge volume of research on central bank decision-making. Yet the psychology of central bank decision-making has largely been unexplored. The evolution of central bank policy frameworks over recent years can be seen as an attempt to make them robust to psychological biases. This is illustrated using the example of the Bank of England’s post-crisis policy framework.
The experience of institutional change at central banks in the United States has been unique and influential. In this chapter, financial historian Conti-Brown traces the singular experience of central banking in the US from the Banks of the United States through the 2008 financial crisis. Particular attention is paid to the rise and fall and rise and fall of the Banks of the United States; the creation of the Federal Reserve System; the changes to the Fed during the Roosevelt Administration and especially under the leadership of Marriner Eccles; the Fed-Treasury Accord of 1951, seen by some as creating the modern independent Federal Reserve, but in fact much more of a tentative understanding at the time. The chapter also analyzes various dynamics between US Presidents and Fed Chairs, perhaps the most important relationship in determining what kind of central bank the US will have. It concludes with a reflection on how the 2008 crisis has changed the Fed and its political relationships.
Frank Decker and Sheelagh McCracken
We investigate how central banking emerged in Australia and New Zealand and how the economic developments shaped the legislative framework of their central banks. After exploring how a free-banking system operated in Australasia in the nineteenth century and how financial crises were resolved without resort to central banks, we trace their evolution during the course of the twentieth century. We show that the rise of central banking was triggered by the breakup of a common £ sterling currency area and that core institutional structures of both central banks were intimately connected with the establishment of the war economies in World War II. As a result of this war legacy, central banks in Australia and New Zealand were for a long time viewed as pure instruments of government policy. The associated institutional structures were only unwound in the late 1980s in a program of innovative and world leading reforms.
Hideki Kanda and Toshiaki Yamanaka
This chapter examines the governance structure of the Bank of Japan ("BOJ"), the central bank in Japan, and the legal setting for the BOJ's monetary and prudential policies. It describes the BOJ's unconventional monetary policies and power to undertake on-site examinations of financial institutions. The Bank of Japan Act was substantially amended and modernized in 1997, and under this new regime, the BOJ has been implementing a series of unconventional monetary policies from 1999 to present; Zero Interest Rate Policy (1999–2000), Quantitative Easing Policy (2001–2006), and Quantitative and Qualitative Easing Policy (2013–present). How legal settings for the central bank interact with the bank's monetary and prudential policies continues to be a topic of academic inquiry, and calls for further research.
Luis I Jácome H
This chapter deals with the evolving role of central banks in Latin America and discusses the past, the present, and the main challenges that lay ahead. The chapter identifies three key periods: the early years; the developmental phase; and the golden years. The analysis highlights central banks’ institutional arrangements and the monetary policy framework in place throughout those periods, and how they played a critical role on the rise and fall of inflation and on periods of banking and currency crises. It also discusses current and future challenges facing Latin American central banks in the aftermath of the global financial crisis.