STRONGER Financial REGULATIONS—PREVENTING FUTURE Financial CRISES
-Regulation should focus on limiting the agency problems created by the “originate-to-distribute” business model—reduce conflicts of interest
-Increased regulation of mortgage brokers
--Tighten licensing requirements
--Require to disclose information
-Fewer subprime mortgage products (no high risk borrowers)
-Regulation of compensation of CEO & other Management
-Higher capital requirements
-Additional regulation of privately owned government sponsored enterprises:
--Fully privatize them
--Completely nationalize them
--Leave them privately owned government sponsored enterprises &
----Strengthen regulation
----Reduce their size
-Heightened regulation to limit financial institutions’ risk taking
-Increased regulation of credit-rating agencies
--Restrict conflicts of interest
-Additional regulation of derivatives(especially gambling and pure speculative products without direct benefit to ‘real economy’)
-{Limiting the size of any single financial company (no more ‘Too Big To Fail’ companies that governments must save due to systemic risk = they may cause the entire financial system to collapse due to linkages in modern monetarized capitalism)}.
-The danger {costs?} of over-regulation.
-{The dangers of under-regulation---costs and systemic risks}
-{The necessity of constant surveillance of new financial devlopments to prevent new institutions and institutional-linkages from creating new systemic risks}
-{Proactive regulatory policy-making (before financial storms and crises)}
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FUTURE OF INTERNATIONAL BANKING REFORMS:
*Basel 2: Reform of the original (1988) Basel accords (so-called Basel 1)
-Plan was to implement them all by 2008
-The Basel 2 accord tries to link capital to actual risks carried by mainly international banks, by adopting worldwide its 3 ‘pillars’: (I) More categories of degree-of-risk for assets to increase accuracy and/or allowing internationally sophisticated banks to have own internal risk system analysis; (II) stronger supervision; (II) more disclosure to public view (i.e. transparency for anyone to see what is occurring).
Basel 3: Now being debated, discussed, developed; it goes even beyond Basel
Ch12 (8th edition) STRUCTURE of CENTRAL BANKS….
----in the U.S.A. the CB is called the ‘FEDERAL RESERVE SYSTEM’ and in the Euro-currency-zone of Europe it’s called ECB,
----also brief accounts of central banks of Canada, England (UK), and Japan
--(Note: In the 9th edition, this chapter became chapter 13—Mish9ed_c13...)
--(Note: In 6th edition study guide this was chapter 14 Mish6ed_StGuide_14)
-Read only material on pages 321-326
-Do not read the rest of the chapter
-Ignore (forget) the questions at end of chapter (too institutionally-focused on the USA)
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REQUIRED SECTION in Chapter and lecture:
CENTRAL BANKS: GOALS—ONE OR SEVERAL?
*Standard Goal of Central Banks since 1970s: The Price Stability Goal
§ Low and stable inflation
§ Inflation (too high rate of price increases) is a problem
– Creates uncertainty and difficulty in planning for the future
– Lowers economic growth (possibility)
– Strains social fabric (losers/creditors and winners/debtors in short and medium run)
§ Nominal anchor to contain inflation expectations
§ Time-inconsistency problem
*Other Goals of Monetary Policy beyond price stability
High employment
Economic growth
Stability of financial markets
Interest-rate stability
Foreign exchange market stability
*Should Price Stability be the Primary Goal?
§ In the long run there is no conflict between the goals
§ In the short run it can conflict with the goals of high employment and interest-rate stability
§ Hierarchical mandate (one optional approach)
§ Dual mandate (more than one goal is important)
§
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USA FED
The USA’s Central Bank is called the ‘FED’ (for the ‘Federal Reserve System’)
THIS following SECTION IS NOT REQUIRED FOR STUDENTS (excessive detail on USA’s particular institutions)
*Why there is a central bank in USA: Origins of the Federal Reserve System
§ Resistance to establishment of a central bank
– Fear of centralized power
– Distrust of moneyed interests
§ No lender of last resort
– Nationwide bank panics on a regular basis prior to 1907
– Panic of 1907 so severe that the public was convinced a central bank was needed
§ Federal Reserve Act of 1913
– Elaborate system of checks and balances (private banks control)
– Decentralized powers and system
*Functions of the Federal Reserve Banks (Regional Centers)
§ Clear checks
§ Issue new currency
§ Withdraw damaged currency from circulation
§ Administer and make discount loans to banks in their districts
§ Evaluate proposed mergers and applications for banks to expand their activities
§ Act as liaisons between the business community and the Federal Reserve System
§ Examine bank holding companies and state-chartered member banks
§ Collect data on local business conditions
§ Use staffs of professional economists to research topics related to the conduct of monetary policy
END OF OPTIONAL SECTION
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REQUIRED SECTION for Students
This Entire Section BELOW here:
pp.321-322
*HOW INDEPENDENT IS THE FED {USA CB}?
§ Instrument and goal independence.
§ Independent revenue
§ Fed’s structure is written by Congress, and is subject to change at any time.
§ Presidential influence
– Influence on Congress
– Appoints members
– Appoints chairman although terms are not concurrent
pp.322-
*THE STRUCTURE AND INDEPENDENCE OF THEECB {Euro CB of 17 of 25)
(ECB = EUROPEAN CENTRAL BANK…This is the Central bank for the Eurozone, the 17 EU member countries who have adopted the Euro as their only currency)
§ Patterned after the Federal Reserve
§ Central banks from each country play similar role as Fed banks
§ Executive Board
– President, vice-president and four other members
– Eight year, nonrenewable terms
§ Governing Council
*Differences between ECB and US Fed:
§ National Central Banks in Eurozone control their own budgets and the budget of the ECB is not
§ Monetary operations are not centralized (conducted in countries)
§ ECB does not supervise and regulate financial institutions (each Euro currency country regulates its own banks)
*ECB--Governing Council
§ Monthly meetings at ECB in Frankfurt, Germany
§ Twelve National Central Bank heads and six Executive Board members
§ Operates by consensus
§ ECB announces the target rate and takes questions from the media
§ To stay at a manageable size as new countries join, the Governing Council will be on a system of rotation
*ECB Independence