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)}

===========

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)

========================================

========================================

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)

§

===================================

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

======================================================

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

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