This change I spoke of in my last post will be in the form
of the Bank of England being in control of financial regulation (back to the way it used to be). If we look back to the characteristics of a central
bank we do indeed see that banking regulation is one the characteristics of a
central bank. This means that the role of the bank of England will be extended
to include “stopping systemic risks and
stopping danger in its tracks” (citywire.co.uk). This will be carried out
in a “twin peaks” format which will be discussed in next week’s blog. The
purpose of this blog is to discuss the reasoning why a central bank should be (or shouldn't be)
involved in regulating banks.
The link posted below is a debate between former members of
the Bank of England and MPC talking about the role of central bank as a
regulator (those in the debate are, Charles Goodhart, Sir John Gieve and Paul Mortimer-Lee):
http://www.centralbanking.com/central-banking/news/1731741/central-banks-preferred-regulators-centralbankingcom-panel
One of the key points from this extremely interesting debate
was that with the central bank being involved in financial regulation is that
it can be “the boss”, which is very helpful so one objective rather than what
happened before where three separate objectives, which gives rise to a "them
and us mentality".
Another point highlighted is that the economy is not constructed in “a block recursive manor” meaning that in the “real world” there isn’t a separation, so there is greater logic to have macro prudential policy with monetary policy but they do raise the question, does this only need to happen in a crisis? However they do point out this can only work in certain countries, it can’t work in Europe. They do acknowledge it would be easier if across the world all central banks were in control of regulation. This would make it easier to cooperate and harmonise the global financial regulation because of the central bank’s “traditions, ethos and professionalism.”.
Another point highlighted is that the economy is not constructed in “a block recursive manor” meaning that in the “real world” there isn’t a separation, so there is greater logic to have macro prudential policy with monetary policy but they do raise the question, does this only need to happen in a crisis? However they do point out this can only work in certain countries, it can’t work in Europe. They do acknowledge it would be easier if across the world all central banks were in control of regulation. This would make it easier to cooperate and harmonise the global financial regulation because of the central bank’s “traditions, ethos and professionalism.”.
Putting
regulation inside the central bank could diminish the independence of the
central bank particularly in a crisis which could have an impact on monetary
policy committee who could try and avoid harming the public sector. So there needs to be some form within the
central bank away from the governor of the central bank, from the regulator
authority, subsidiary, separate committee which is happening the UK. There is
also the risk that the central banks lose creditability if there is a financial
crisis. However banks got blame regardless so might as well take
responsibility. There are also arguments that central bank do not react harsh
enough when faced with a crisis. On the other hand they may over regulate to
protect their reputation. So this debate highlighted a lot of arguments both
for and against the Bank of England taking charge of regulation once again,
will it work? Only time will tell…
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