Banking on the Future: The Fall and Rise of Central Banking PDF
Preview Banking on the Future: The Fall and Rise of Central Banking
Banking on the Future This page intentionally left blank Banking on the Future THE FALL AND RISE OF CENTRAL BANKING Howard Davies David Green princeton university press princeton and oxford Copyright©2010 byPrincetonUniversityPress PublishedbyPrincetonUniversityPress, 41WilliamStreet,Princeton,NewJersey08540 IntheUnitedKingdom:PrincetonUniversityPress, 6OxfordStreet,Woodstock,OxfordshireOX201TW AllRightsReserved LibraryofCongressCataloging-in-PublicationData Davies,H.(Howard),1951– Bankingonthefuture:thefallandriseofcentralbanking/ HowardDavies,DavidGreen. p.cm. Includesbibliographicalreferencesandindex. ISBN978-0-691-13864-0(alk.paper) 1.Banksandbanking,Central.2.Monetarypolicy.I.Green, David,1946– II.Title. HG1811.D382010 332.1’1–dc22 2009053367 AcataloguerecordforthisbookisavailablefromtheBritishLibrary ThisbookhasbeencomposedinLucidausingTEX TypesetandcopyeditedbyT&TProductionsLtd,London Printedonacid-freepaper(cid:1)∞ press.princeton.edu PrintedintheUnitedStatesofAmerica 10987654321 Contents Preface vii Abbreviations ix Introduction 1 ChapterOne WhatIsCentralBankingandWhyIsItImportant? 9 ChapterTwo MonetaryStability 23 ChapterThree FinancialStability 52 ChapterFour FinancialInfrastructure 90 ChapterFive AssetPrices 115 ChapterSix Structure,Status,andAccountability 141 ChapterSeven Europe:ASpecialCase 182 ChapterEight CentralBankinginEmergingMarketCountries 212 v CONTENTS ChapterNine FinancialResources,Costs,andEfficiency 236 ChapterTen InternationalCooperation 252 ChapterEleven Leadership 270 ChapterTwelve AnAgendaforChange 285 Afterword 297 Notes 301 Index 317 vi Preface Wewerepromptedtowritethisbookbytherealizationduringthewin- terof2007–8thatmajorshiftsweresuddenlyafootintheworldofcen- tralbanking.Afteranextendedperiodinwhichcentralbanksappeared to be capable of doing no wrong, the objectives, and even the roles, of central bankers were being abruptly questioned, as were the tools they had at their disposal and the way they used them. What really was the purpose of a central bank? Had central banks somehow lost their way and forgotten what they were there for? Were long-dormant functions being rediscovered? As we continued to write during 2008 and 2009, suchquestionsbecamemoreandmoreacute. This is not an academic textbook about the economics of monetary policy,norisitadetailedhistoricalaccountoftheevolutionoftherole ofthecentralbank.Stilllessisitatechnicalguidetothenutsandbolts ofcentralbankoperationsandactivities. Rather, it seeks to set recent events in the context of the wider perspective—askingwhatcentralbanksarefor,whytheirroleiscritical tothefunctioningofmarketeconomies,howtheycanbestgoaboutful- fillingthatrole,andwhetherrecentexperienceandhistoricperspective pointtotheneedforfurtherreappraisalandreform.Weparticularlylook atthewiderpoliticalandinstitutionalframeworkinwhichtheyoperate. In setting the wider scene in which the crisis unfolded, we became consciousthattherecentandunprecedentedwholesaledisruptionthat struck the financial system was in fact foreseen, or at least foreshad- owed,bysomeseriousobservers,bothwithincentralbanksthemselves and in academia. It is disappointing to note that much of this thinking, whether on asset price bubbles or the procyclicality of capital require- mentsunderthesecondrevisionoftheBaselcapitalaccord,waslargely ignored by practitioners at the time. We hope that this volume, which integrates a review of academic writing with the perspective of current centralbankers,willhelpbridgethatimportantgap. vii PREFACE Wealsodrawonourowndirectexperiences,whetherduringthetime when we were practicing central bankers ourselves or when we were working alongside the central bank in a separate financial regulatory organization.Inevitably,whatwewriteiscoloredbythatexperience. We would particularly like to thank our former central banking col- leagues, Clive Briault, Alastair Clark, Andrew Crockett, Michael Foot, Charles Goodhart, Lionel Price, David Strachan, Philip Turner, Geoffrey Wood, and Paul Wright, each of whom reviewed earlier drafts in full or in part and frequently contributed fresh insights. Staff at the Bank for International Settlements were especially helpful and gave us access to theirwork.WearegratefultoRosaLastraforanumberofdetailedsug- gestions as well as for the wealth of fundamental material to be found inherownwritings.Wearealsoindebtedtothemanycentralbankgov- ernors and other senior officials, past and present, to whom we talked asweassembledourownthoughts.Theyweregenerouswiththeirtime, evenduringwhatwasafraughtperiod. At the London School of Economics Nick Vivyan was an invaluable guidetotheacademicliterature.ClareTaylorGold,RachelGibson,Emily- Jane McDonald, and Sally Goiricelaya all worked hard to ensure that a final text saw the light of day. Richard Baggaley at Princeton University Press was encouraging throughout and we are grateful to Sam Clark of T&TProductionsLtd,ourcopyeditor,whopressedustirelesslytoensure thatoursentencesreallyworkedandourreferencestoo.SusannahHaan alsoprovidedhelpfulcomments. Lastly,weneedtonotethattheviewsexpressedhereareentirelyour ownandnotthoseofanyoftheorganizationswithwhichweareorhave beenassociated. ThefinalrevisionstothismanuscriptwereundertakeninAugust2009 andthereaderwillneedtobearthisinmindintheever-evolvingworld ofcentralbanking. viii Abbreviations AIG AmericanInternationalGroup BCCI BankofCreditandCommerceInternational BIS BankforInternationalSettlements CGFS CommitteeontheGlobalFinancialSystem CHAPS ClearingHouseAutomatedPaymentSystem CPI ConsumerPriceIndex CPSS CommitteeonPaymentandSettlementSystems CSRC ChinaSecuritiesRegulatoryCommission DMO DebtManagementOffice ECB EuropeanCentralBank EMC EmergingMarketCountry EMU EconomicandMonetaryUnion ERM ExchangeRateMechanism ESCB EuropeanSystemofCentralBanks ESRC EuropeanSystemicRiskCouncil EU EuropeanUnion FOMC FederalOpenMarketCommittee FSA FinancialServicesAuthority FSB FinancialStabilityBoard FSF FinancialStabilityForum FSI FinancialSoundnessIndicator FSR FinancialStabilityReview IFI InternationalFinancialInstitution IMF InternationalMonetaryFund IOSCO InternationalOrganizationofSecuritiesCommissions IT InflationTargeting Libor LondonInterbankOfferedRate LOLR LenderofLastResort MENA MiddleEastandNorthAfrica MOU MemorandumofUnderstanding ix
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