Central bank’s role and involvement in bank regulation: Lender of last resort arrangements and the Special Resolution Regime (SRR)

Ojo, Marianne (2009): Central bank’s role and involvement in bank regulation: Lender of last resort arrangements and the Special Resolution Regime (SRR).

Abstract

This paper considers developments which have necessitated greater involvement and a greater role for the central bank in financial regulation and supervision. The aftermath of the 2007/08 financial crisis has witnessed the enactment of legislation such as the Banking Act of 2009 which has not only introduced greater statutory powers for the central bank, but also the Special Resolution Regime. As well as a consideration of arguments which are in favour of the central bank’s role as supervisor and lender of last resort, the importance of central bank independence and safeguards which exist to ensure that sufficient accountability is fostered, will be considered. Safeguards and accountability mechanisms which are adequate, such that, whilst ensuring that the regulator is not susceptible to regulatory capture, do not impede the ability of such a regulator to obtain vital and necessary information from systemically important individual financial institutions. In its support of the view that central banks should assume a greater role in supervision, this paper not only seeks to justify why such a degree of involvement is vital to ensuring and maintaining stability in the financial system, but also those factors which are considered to be necessary if such a role is to be effective.

• Item Type: MPRA Paper
• Language: English
• Keywords: central; bank; lender; last; resort;regulation;monetary;policy; special resolution regime; Financial Crisis; liquidation; bankruptcy; systemic risks; living wills; bailing in; resolution procedures; deposit protection; liquidity
• Subjects: K - Law and Economics > K2 - Regulation and Business Law; D - Microeconomics > D0 - General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; G - Financial Economics > G0 - General > G01 - Financial Crises

References

Amtenbrink F, ‘Securing Financial Independence in the Legal Basis of a Central Bank’ <http://repub.eur.nl/res/pub/8350/>

Bank of England, „News Release, Financial Stability Committee“ < http://www.bankofengland.co.uk/publications/news/2009/048.htm>

Basel Committee on Banking Supervision, Resolution Policies and Frameworks – Progress So Far, July 2011, BIS Publications

Buiter, W, Central Banks and Financial Crises (Paper presented at the Federal Reserve Bank of Kansas City’s symposium on “Maintaining Stability in a Changing Financial System”, at Jackson Hole, Wyoming, on August 21-23, 2008)

Buiter W, Central Banks and Financial Crises European Institute, London School of Economics and Political Science, NBER and CEPR <http://www.nber.org/~wbuiter/hole.pdf>

Buiter W, ‘What’s Left of Central Bank Independence?’ < http://blogs.ft.com/maverecon/2009/05/whats-left-of-central-bank-independence/>

De Larosière, 2009, “Report of the High-level Group on Financial Supervision in the EU,” Brussels, Feb 25, 2009

Deutsche Bundesbank, ‘Deutsche Bundesbank's Involvement in Banking Supervision’ Monthly Report (September 2000)

Deutsche Bundesbank, „Bundesbank and German Federal Financial Supervisory Authority (BaFin)“ <http://www.bundesbank.de/bankenaufsicht/bankenaufsicht_bafin.en.php >

Federal Deposit Insurance Corporation, History of the Eighties: Lessons for the Future, FDIC, (1997) Washington DC, http://www.fdic.gov/bank/historical/history/

Federal Deposit Insurance Corporation , Managing the Crisis: The FDIC and the RTC Experience, FDIC,(1998) Washington DC http://www.fdic.gov/bank/historical/managing/contents.pdf

Financial Services Authority, „ Memorandum of Understanding between HM Treasury, the Bank of England and the Financial Services Authority“ < http://www.fsa.gov.uk/pubs/mou/fsa_hmt_boe.pdf>

González-Páramo J, ‘Managing Risk: The Role of the Central Bank in a Financial Crisis’ Speech Given at Risk Europe 2009 Frankfurt am Main, 4 June 2009 <http://www.ecb.int/press/key/date/2009/html/sp090604.en.html>

Goodhart C and Schoenmaker D ' Institutional Separation Between Supervisory and Monetary Agencies ' (Financial Markets Group Special Papers 1992 )140-141

Goodhart CAE The Emerging Framework of Financial Regulation (1998)

Goodhart CAE, “Central Banks’ Function to Maintain Financial Stability: An Uncompleted Task,” VoxEU.org (June 24, 2008), http://www.voxeu.org/index.php?q=node/1263

Guha K ‚ Fed Moves To Minimise Systemic Risk’ The Financial Times March 14 2008

Hadjiemanuil C, Banking Regulation and the Bank of England 1995 Lloyds of London Press

HM Treasury, Bank of England and FSA, 2008, “Financial Stability and Depositor Protection: Further Consultation,” July 2008

HM Treasury, „Banking Act 2009“ <http://www.hm-treasury.gov.uk/fin_banking_act2009.htm>

Hüpkes EHG, Quintyn M, Taylor M, ‘The Accountability of Financial Sector Supervisors: Theory and Practice 2006

Lastra RM, Legal Foundations of International Financial Stability Oxford University Press 2006

Lawson J and Barnes S and Sollie M ‘Financial Market Stability in the European Union: Enhancing Regulation and Supervision’ Economics Department Working Paper No. 670

Moffatt P and Campbell A, Emerging Changes to the United Kingdom’s Financial-Sector Safety Net Following the Banking Crisis of 2007–2008 Banking & Financial Services Policy Report Volume 30 • Number 7 • July 2011

Muellbauer J, ‘The Folly of the Central Banks of Europe’ October 2008 <http://www.voxeu.org/index.php?q=node/2488>

Nier W, ‘Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis’ IMF Working Paper WP/09/70 April 2009

Raghallaigh F and Kennedy M, „Banking Crises and Special Resolution Regimes“ February 2011 Mazars Publications

Reinhart C and Felton A, ‘The First Global Financial Crisis of the 21st Century: Part II, June – December 2008 < http://mpra.ub.uni-muenchen.de/13604>

Reuter W, Spiegel Online ,“Worst Financial Crisis Since 1931?“ <http://www.spiegel.de/international/business/0,1518,536635,00.html>

Schoenmaker D and Oosterloo S, “Financial Supervision in Europe: A Proposal for a New Architecture”, in: L. Jonung, C. Walkner and M. Watson (eds), Building the Financial Foundations of the Euro - Experiences and Challenges, 2008 Routledge, London.

Singh D, The UK Banking Act 2009, Bank Resolution and Early Intervention: Policy and Practice, PowerPoint presentation, Symposium on Managing Systemic Risk, 7 – 9 April 2010, University of Warwick.

Smaghi LB, ‘Central Bank Independence in the EU: From Theory to Practice’ European Law Journal, Vol. 14, No. 4, July 2008

Smits R, ‘European Central bank Institutional Aspects’ 1997 Kluwer Law International

Stella P and Lönnberg A, ‚Issues in Central Bank Finance and Independence’ IMF Working Paper WP/08/37 and in particular, the European Monetary Institute’s report EMI (1998) “Convergence Report”

Treasury and Civil Service Committee, Sixth Report: “The Regulation of Financial Services in the UK” House of Commons, (1994-1995) 332 para 108