Monetary Law Blog

Bank of England Under UK Parliament Scrutiny

Governance at the Bank of England must be strengthened to reflect its new powers, parliamentarians (MPs) on the Commons Treasury Committee have demanded in a report published this week ('Accountability of the Bank of England'). 

Main recommendations:

• The Court of the Bank of England should be transformed into a smaller, more expert Supervisory Board with its own staff.
• The Minister of Finance ('Chancellor') should be responsible and accountable in a period of financial turbulence where public money is at risk; in these circumstances the Chancellor should be given a temporary and limited power to direct the Bank, according to MPs. 

The MPs also propose that:

• The Governor of the Bank be appointed for a single, non-renewable term of 8 years.
• A majority of external members sit on the Financial Policy Committee (FPC) and the Monetary Policy Committee (MPC).
• The new macro-prudential tools to be given to the FPC  be subject to thorough parliamentary scrutiny.

 

A Global Central Bank

An International Monetary Policy Committee accountable to world leaders, that is what the Committee on International Economic and Policy Reform proposes in its report Rethinking Central Banking.

This International MPC sould comprise representatives of major central banks and report on the aggregate consequences of individual central banks policies. According to the Committee this would encourage large-country central banks to internalize the spillover effects of their policies.

The Committee also propose that central banks should go beyond their traditional focus on inflation fighting and adopt an explicit financial stability objective; macroprudential policy should be used alongside monetary policy in pursuit of this 'new' objective.

The Committtee's report can be downloaded from the Brookings Institution website.

Macro-Financial Stability in the New Normal (IMF Conference)

In the aftermath of the global financial crisis, monetary and regulatory policies are being reassessed to reduce systemic vulnerabilities and costly financial crises.

The global financial crisis has highlighted weakness in macroeconomic and regulatory policies and market failures that contributed to a buildup of systemic risks. In this context, numerous questions have arisen. What was the role of monetary policy and financial regulation in contributing to vulnerabilities? How can monetary policy be adapted to achieve greater financial stability? What are the lessons from the crisis for the design of macro-prudential policies and regulations? What are specific lessons for emerging markets that are experiencing large and volatile capital flows? Is there a need to revisit financial liberalization?

The Macro-Financial Unit in the IMF Research Department is organizing an academic conference, where leading economists will present their work on these issues, shed light on lessons learned from the crisis, and provide policy suggestions.

Date: April 7, 2011

Time: 8:30 am – 4:00 pm

Venue: HQ1-R-710 (Auditorium)
700, 19^th St N.W., Washington, D.C.

 

What Role for the New Financial Stability Board?

"Under any scenario, then, it is clear that the FSB is likely to have an important future in international regulatory politics. If the political support behind strengthening the international standards regime holds up, the FSB will certainly have its hands full, including with the tasks of addressing the challenges outlined in the previous section. But if it fails to meet those challenges and support for stronger international standards erodes, the FSB could still have a central role to play in pioneering new forms of international cooperation to support a more pluralistic and decentralized international regulatory order. The new fourth pillar of global economic governance is clearly here to stay, even if its place in the world is not quite yet determined."

Professor Eric Helleiner (University of Waterloo, Ontario) concludes so in Global Policy: "What Role for the New Financial Stability Board? The Politics of International Standards after the Crisis"

After discussing the emergency of the international standards regime and the creation and role of the FSB, Helleiner discusses the challenges the FSB is confronted with:

• developing more efficient and effective mechanisms for monitoring and encouraging compliance;
• developing effective international standards that minimize future crises;
• overcoming legitimacy issues because of the FSB's narrow membership;
• establishing its legitimacy within the domestic polities of the member countries; and
• clarifying its relationship with other global governance institutions, in particular the G20, the IMFC, and many standard setting boards.

 

 

Did central banks do enough to properly tackle the Great Recession?

That's bascially the argument between The Economist bloggers Free Exhange and Buttonwood--read latest post. The question to central bank lawyers would be "does your central bank have all necessary legal authority?" Well, does it?

A more complicated game for central banks

"The West’s financial crisis has shaken public confidence in its leading central banks. Yet it has also led to an expansion of their duties and powers. ...In a sense, central banks have returned to their roots. The first central banks were created to handle the sovereign’s financial affairs and issue a national currency. That endowed them with competitive advantages that led naturally to becoming lenders of last resort to commercial banks. Because such lending created moral hazard and the risk of loss, they also became those banks’ supervisors."

That's in a nutshell The Economist's take on the changes confronting central banks in a new article ('A More Complicated Game').

 

 

The role of central banks after the crisis

"The current crisis will have far-reaching consequences for the role and responsibilities of central banks. They will need to pay greater and more symmetric attention to financial considerations in framing their monetary policy. They will also need to play an important role in any macroprudential policy framework that is set up - even when they are not responsible for detailed implementation. But wider responsibility requires greater accountability. Strengthened governance arrangements must both ensure accountability and provide central banks with the autonomy needed to conduct monetary policy and financial stability policy."

Abstract of a speech by Mr Jaime Caruana, General Manager of the BIS, to the Observatory of the European Central Bank, on 19 January 2011.

For the full text of the speech, follow this link to the BIS website.

 

FCIC: "Financial crisis could have been prevented"

The US Financial Crisis Inquiry Commission (FCIC) has concluded that the crisis of 2007-2009 was avoidable—the result of human actions, inactions, and misjudgments. Warnings were ignored. “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.”

According to the Commission the crisis was caused by:

• Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages;
• Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk;
• An explosive mix of excessive borrowing and risk by households and Wall Street that put the
  financial system on a collision course with crisis;
• Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw;
• And systemic breaches in accountability and ethics at all levels.

Source: FCIC website

ELA: An Emperor without Clothes?

Emergency liquidity assistance (ELA) by the Irish central bank (CBI) is the subject of a recent Citigroup Global Markets' note authored by Willem Buiter, Jürgen Michels, and Ebrahim Rahbari. They comment, from a legal and economic perspective, on CBI's ELA to Irish banks against the backdrop of the euro area's stress and the possibility of insolvency of either or both the CBI and the Irish sovereign.

Follow this link to the note.

Netherlands Plans to Make Call for Bank Run a Criminal Offense

The Dutch government intends to make calls for bank runs a criminal offense. At the start of 2011 the Dutch Ministry of Justice plans to send a draft bill amending the Dutch Criminal Code, it said in a statement today. Under the draft legislation, inciting customers to withdraw their money from a bank may lead to a maximum punishment of a 19,000-euro (approx. $24,881) fine or a four- year prison term.