Han central bank regulation and the financial crisis; a comprehensive analysis (2016)

Palgrave Macmillan Studies in Banking and Financial Institutions Series Editor: Professor Philip Molyneux The Palgrave Macmillan Studies in Banking and Financial Institutions are international in orientation and include studies of banking within particular countries or regions, and studies of particular themes such as Corporate Banking, Risk Management, Mergers and Acquisition The books’ focus is on research and practice, and they include up-todate and innovative studies on contemporary topics in banking that will have global impact and influence Titles include: Pierluigi Ciocca STABILISING CAPITALISM A Greater Role for Central Banks Anabela Sérgio (editor) BANKING IN PORTUGAL Michele Modina CREDIT RATING AND BANK-FIRM RELATIONSHIPS New Models to Better Evaluate SMEs Jes Villa ETHICS IN BANKING The Role of Moral Values and Judgements in Finance Dimitrios D Thomakos, Platon Monokroussos & Konstantinos I Nikolopoulos (editors) A FINANCIAL CRISIS MANUAL Reflections and the Road Ahead Elena Beccalli and Federica Poli (editors) BANK RISK, GOVERNANCE AND REGULATION LENDING, INVESTMENTS AND THE FINANCIAL CRISIS Domenico Siclari (editor) ITALIAN BANKING AND FINANCIAL LAW SUPERVISORY AUTHORITIES AND SUPERVISION INTERMEDIARIES AND MARKETS CRISIS MANAGEMENT PROCEDURES, SANCTIONS, ALTERNATIVE DISPUTE RESOLUTION SYSTEMS AND TAX RULES Fayaz Ahmad Lone ISLAMIC FINANCE Its Objectives and Achievements Valerio Lemma THE SHADOW BANKING SYSTEM Creating Transparency in the Financial Markets Imad A Moosa GOOD REGULATION, BAD REGULATION Elisa Menicucci FAIR VALUE ACCOUNTING Key Issues Arising from the Financial Crisis Anna Omarini RETAIL BANKING Business Transformation and Competitive Strategies for the Future Yomi Makanjuola BANKING REFORM IN NIGERIA FOLLOWING THE 2009 FINANCIAL CRISIS Ted Lindblom, Stefan Sjogren and Magnus Willeson (editors) GOVERNANCE, REGULATION AND BANK STABILITY FINANCIAL SYSTEMS, MARKETS AND INSTITUTIONAL CHANGES Gianluca Mattarocci ANOMALIES IN THE EUROPEAN REITS MARKET Evidence from Calendar Effects Joseph Falzon (editor) BANK PERFORMANCE, RISK AND SECURITIZATION BANK STABILITY, SOVEREIGN DEBT AND DERIVATIVES Josanco Floreani and Maurizio Polato THE ECONOMICS OF THE GLOBAL STOCK EXCHANGE INDUSTRY Palgrave Macmillan Studies in Banking and Financial Institutions Series Standing Order ISBN: 978–1–403–94872–4 (outside North America only) You can receive future titles in this series as they are published by placing a standing order Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England Central Bank Regulation and the Financial Crisis A Comparative Analysis Miao Han Durham University, UK © Miao Han 2016 Softcover reprint of the hardcover 1st edition 2016 978-1-137-56307-1 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The author has asserted her right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2016 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-55548-2 ISBN 978-1-137-56308-8 (eBook) DOI 10.1007/978-1-137-56308-8 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Ha, Miao, 1982– Central bank regulation and the financial crisis : a comparative analysis / Miao Han pages cm.—(Palgrave Macmillan studies in banking and financial institutions) Includes bibliographical references Banks and banking, Central – Case studies Banks and banking, Central – Law and legislation Monetary policy Financial crises Global Financial Crisis, 2008–2009 I Title HG1811.H22 2015 332.1′1—dc23 2015021870 For My Parents 献给我的父母 This page intentionally left blank Contents List of Figures viii List of Tables ix Acknowledgements xi List of Abbreviations xii Introduction Part I Theoretical Framework Central Banks’ Two-Tier Relationships 13 The Global Financial Crisis: The Challenge for Central Banks 40 Part II Case Studies US Federal Reserve System and the Global Financial Crisis 53 Bank of England and the Global Financial Crisis 89 Bank of Japan and the Global Financial Crisis 124 From Centrally Planned Economy to Market-Oriented Principles: The People’s Bank of China under Change 156 People’s Bank of China and the Global Financial Crisis: Policy Responses and Beyond 183 Part III 10 Comparative Analysis Central Bank Regulation toward Financial Stability: Convergence, Divergence, or Multiple Pathways? Evidence from the Comparative Study 217 Conclusion 262 Bibliography 268 Index 315 vii List of Figures 2.1 2.2 2.3 2.4 3.1 4.1 4.2 4.3 4.4 5.1 5.2 5.3 5.4 5.5 6.1 6.2 6.3 6.4 7.1 7.2 8.1 8.2 8.3 8.4 8.5 9.1 9.2 9.3 9.4 The two-tier relationship governing a central bank Legal framework of central bank The role of central banks in maintaining financial stability Logic of the argument of this book The originate-and-distribute banking model The Federal Reserve System Federal funds effective rates between end of 1999 and May 2013 Financial regulation and supervision regime under Dodd–Frank Act Changed two-tier relationships of the US Fed UK tripartite model of financial regulation and supervision BOE bank rates between May 1992 and July 2007 BOE bank rates between July 2007 and March 2013 Nationalisation of Northern Rock under the tripartite model New UK financial regulation and supervision system Japan’s new financial regulation and supervision system Time-series setting of BOJ interest rates between 1998 and 2006 Time-series setting of BOJ interest rates between 2006 and mid-2013 The BOJ in financial crisis Financial structure in China in the 1950s The shadow system of the PBC Changes in China’s monthly trade and FDI inflows between July 2008 and January 2010 Composition of PBC’s holdings of US securities in June 2008 PBC interest rates between March 2007 and December 2008 PBC interest rates between December 2008 and July 2012 The GFC challenge for the PBC GFC changes government–market nexus How central banks’ orientations have evolved Comparison between old and new two-tier relationships How the GFC challenged central banks viii 14 29 35 38 45 65 69 84 86 99 102 103 111 119 136 139 143 152 158 180 185 188 189 196 210 252 253 254 255 List of Tables 4.1 4.2 4.3 4.4 5.1 5.2 5.3 5.4 5.5 6.1 6.2 6.3 7.1 7.2 7.3 8.1 8.2 8.3 8.4 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Monetary policy actions authorised under Federal Reserve Act Major changes around the US Fed’s two-tier relationship before the GFC Classification of facilities and programmes established by the US Fed during the GFC Legal framework of the US Fed – changes during the GFC Major changes around the BOE’s two-tier relationship before the GFC BOE’s monetary policy responses during the GFC BOE balance sheet between November 2006 and October 2011 Changed facilities for the BOE’s operation in the SMF Legal framework of the BOE – changes by the GFC Major changes around the BOJ’s two-tier relationship before the GFC Quantitative easing from the BOJ between 2008 and 2013 Monetary policy responses from the BOJ: 2001–2006 vs GFC China’s financial commitments under the WTO Major changes of the PBC around its two-tier relationship Comparison between PBC Law 1995 and PBC Law 2003 Chinese commercial banks’ exposure to US subprime mortgage securities Sector breakdown of China’s fiscal stimulus package China in the AFC and the GFC compared PBC’s performances at different stages of the GFC Comparing central bank objectives Comparing central bank organisational structures Comparing monetary policy instruments under legal provisions Comparing financial regulation and supervision Comparing central bank independence Comparing statutory crisis management solutions Comparing central bank actions and policies in US, UK, Japan and China during the GFC ix 63 67 78 87 100 104 105 106 121 137 144 153 171 176 178 186 191 207 209 219 222 224 225 227 230 231 Bibliography 305 in Stiftung Bertelsmann (ed.) 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of England Act 1946, 90, 91, 94, 100, 244 Bank of England Act 1998, 90, 93–4, 97, 101, 115, 243 Bank of Japan Act 1882, 125 Bank of Japan Act 1942, 125–6, 137, 226, 246 Bank of Japan Act 1998, 128–9, 131, 133, 138, 246 Banking Act 1935, 57, 58, 60, 67, 244 Banking Act 1979, 90, 91, 100, 244 Banking Act 1987, 90, 92, 97, 100, 244 Banking Act 2008, 113–4 Banking Act 2009, 90, 114, 119, 234, 249 Banking Holding Company Act 1956, 64, 244 banking, originate-and-distribute, 43–4, 110, 231 banking, shadow, 43, 210, 252– bankruptcy procedures, 25, 32–3, 114, 135–7, 151–2, 153, 230 Barings crisis, 97– Basel Accord 1988, 24, 37, 66, 102, 133, 172 Basel II, 112, 135 Basel III, 37, 82, 109, 150, 152 censorship, 9, 164 Central bank in crisis, 10, 139, 151 Central bank independence, 8, 26–29, 34, 50, 58–9, 67, 77–8, 85, 94–5, 124–6, 189–90, 193–8, 247–9, 249–50, 260–2, 264–5, 275–7, 283, 288 Central bank objectives, 22, 53, 59, 87, 104, 121, 127, 167, 171, 178, 219–21, 231, 239–41 Central bank regulation, 1, 34–5, 229–34, 240, 248–9, 255 see also crisis management solutions Charter of the Bank of England 1694, 90, 100, 245 Charter of the Bank of England 1998, 90, 245 China Banking Regulation Commission Decision 2003, 174–5, 246 collaboration cross-border, 15, 35–7, 76, 109, 150–1, 153, 201–3, 210, 232, 258, 267 regional, 46–7, 203–4, 209, 258 comparative analysis convergence, 6, 10, 228–9, 237–43, 252–5, 258–9, 263 divergence, 6, 10, 238–9, 237–43, 250–53, 252–5, 258–9, 263, 267 consolidated regulation, 6–7, 66, 85–8, 225, 236, 240, 244 contagion, 18, 25, 36, 41 Convertible Bank Note Act 1884, 125, 137, 245 Convoy system, 133 Core value of central banks bankers’ bank, 3, 13, 14, 29, 38, 253, 261–2, 265 government’s banker, 3, 13, 14, 17, 253, 261–2, 262 see individual propositions *References to tables and figures are in italic 315 316 Index crisis management solutions, 20, 30–34, 38–9, 46, 68, 103, 125, 143, 152, 188–9, 206–7, 229–30, 238–42, 245, 253, 256 decision-making, 28, 67, 101, 128, 157, 179, 222 deflation, 131–2, 146, 152, 153, 154, 220, 256–7 deposit insurance, 16, 24, 32, 75, 87, 98, 134–6, 202, 230 Deposit Insurance Law 1998, 135–6, 246 Depository Institutions Deregulation and Monetary Control Act 1980, 31, 244 deregulation, 7, 17, 37, 966, 171, 50–1 Dodd–Frank Act 2010, 8, 80–83, 85–7, 235, 242, 248, 263 dual subordination, 173, 176, 177 178, dual-chartering banking system, 54, 55–6, 63 dual-track systems, 161, 179 Economic Stimulus Act 2008, 234 Emergency Banking Act 1933, 58, 67, 244 Emergency Economic Stabilization Act 2008, 68, 234 Employment Act 1946, 59, 67, 244 EC Directives, 32, 92–3, 99, 100 Federal Deposit Insurance Corporation Improvement Act 1991, 31, 244 Federal Reserve Act 1913, 55, 244 Section 13(3), 57, 62–3, 76, 82–3, 244–7 Finance Law 1947, 126, 246 financial crises, 2, 15, 34, 35, 47–8, 89, 229, 231 see also systemic risk Financial Function Early Restoration Law, 134–6, 138, 246 Financial Function Strengthening Act, 141, 150, 235 financial imbalance, 48, 153, 235, 241 Financial Reconstruction Law, 134–6, 138, 246 Financial Services Act 1986, 96 Financial Services Act 2012, 7, 89, 114, 118–20, 121, 234, 249 Financial Services and Markets Act (FSMA 2000), 96–9, 101, 111, 115, 245 financial stability, 1–3, 18–21, 34–5, 48–9, 79–82, 95–6, 99, 114, 119, 121, 172–3, 276–8, 236–9, 238–40, 249–50 fiscal stimuli, 46, 83–4, 119–20, 162–3, 152, 186, 208–9, 217, 209, 275 Full Employment and Balanced Growth Act 1978, 59, 60, 67, 240, 244 Geithner, Timothy, 75 Glass–Steagall Act 1932, 57, 67, 244 Glass–Steagall Act 1933, 57, 67, 244 globalisation, 35–6, 258–9 Gold Reserve Act 1934, 57, 67, 244 government intervention, 5–6, 24, 26–7, 34–6, 162, 181, 212–3, 227–8, 237–8, 249–52 government-market nexus, 10, 249–53, 255, 258 gradualism, 161, 173, 204 Gramm–Leach–Bliley (GLB) Act 1999, 43, 64–5, 67, 82, 244 Great Depression of the 1930s, 56–8, 63, 64, 230 Great Moderation era, 40, 142, 231 Greenspan, Alan, 59, 62, 223 HM Treasury, 89, 91–2, 98–9, 108, 111–3, 118–20 Housing and Economic Recovery Act 2008, 234 illiquidity, 30, 32 individual propositions of central banks government-controlled, 6–7, 10–11, 168, 210, 226–8, 259–60 government-guided, 7, 136–8, 150–5 government-owned, 6–7, 166–8, 172–3, 175–81 market-oriented, 5–7, 66–7, 85–8, 100–02, 120–3, 226, 254, 255, 259–60 industrialisation, 127, 156, 162, 251 inflation control, 16–17, 61–2, 121–2, 130, 153, 295 inflation targeting, 72–3, 93, 94–5, 106–08, 146–8, 152, 219, 236–7 Index 317 information disclosure, 170, 172, 181, 193, 225 insolvency, 30, 32–3, 98, 110, 114, 248 see also bankruptcy compare illiquidity institutional structure of central bank, 27, 161, 169, 181, 199, 221–4, 229, 265–6 of financial regulation and supervision, 48, 98–9, 136–7, 224–6, 240–3 interdisciplinary, 7–8, 266 interest rate cuts, 68, 104, 139, 143, 188 internationalisation, 36, 203–4 Japan Revitalization Strategy, 146, 235 Johnson Matthey Bank Crisis, 93 Joint Stock Bank Act, 91 Knickerbockers Trust Company Crisis, 54 legal framework, 8–9, 21, 29, 38, 53, 86, 87, 90, 121, 127, 172, 228, 238–40, 242–3, 249, 253, 255, 259–61 legal frameworks, rule-based, 8, 21, 243, 266 legal provisions, 8–9, 21, 31, 49, 131, 175, 224, 238 legal status of central bank, 21, 29, 99, 181, 190, 243 of regulators, 107 Lehman Brothers crisis, 45, 46, 78, 86, 158, 207, 254, 270 lender of last resort (LOLR), 16, 22–3, 33–5, 38–9, 54, 62–5, 69–71, 95, 105–6, 109, 142–3, 149, 251, 260–4, 271–3 liberalisation, 5–7, 278, 282–4 financial, 20, 39–40, 139–40, 176–8, 182, 186, 188, 218–24, 230 liquidity risk, 122, 163–4, 167, 168, 256, 271 liquidity shortage, 22–3, 28, 61, 143, 219, 224, 281 main bank system, 146 maker of market, 176, 270, 274 market principles, 5, 9, 175–7, 220–1, 233, 271 market-exit arrangements, 36–7, 184 see also bankruptcy Masaru, Hayami, 141, 145 Matsukata, Masayoshi, 137 mega-regulator, 54, 107–8, 109, 133, 262 Memorandum of Establishing a New Economic System 1940, 138, 150, 268 Memorandums of Understanding (MoU), 106, 122–3, 129–30 modernisation, 71, 74, 88, 173–5 monetary easing, 53, 82, 160–2, 169–70 monetary expansion, 45, 62, 81, 131–2, 156–7, 207, 225, 253, 265–6 see also monetary easing monetary framework, 159, 162 monetary operation, 100–1, 133 Monetary Policy Committee Regulation 1997, 269 Monetary policy committees (MPC), 103–4, 117–19, 129–31, 189–90, 196–8, 218, 243–4, 250 monetary policy conduct, 21–3, 74–5, 118–19, 160–1, 167, 169, 188, 232, 240 see also monetary operation monetary policy instruments, 16, 19–20, 25–6, 38–9, 68–9, 141–2, 189, 244–5, 260–2 monetary stability, 17–18, 24–5, 38–9, 53, 260–1 see also price stability monetary supply, 184, 189, 194 money supply, 116, 172–3, 193, 207 moral Hazard, 35–7, 54, 123, 140, 254 National Banking Act 1863, 60 nationalisation of central bank, 24, 100, 248 of financial institutions, 121–3, 124–5, 147 neo-liberalism, 5, 28, 272–5, 281, 282 nipponisation, 9, 238, 277–80 Northern Rock crisis, 121–4 open market operations (OMOs), 6, 19, 69–71, 117, 163, 195, 219, 230, 244–5 318 Index organisational structure, 25, 32, 67–8, 104, 141, 189, 241–4, 260–1, 289 ownership of central bank, 24, 32 public, 121–2, 125, 134, 172 People’s Bank of China Law 1995, 182–4, 193, 194, 269 People’s Bank of China Law 2003, 184, 188–90, 193, 194, 241, 269 price stability, 24–5, 53, 81–2, 103–4, 140, 160–2, 239–41 Prompt Corrective Action, 148–9, 251, 269 propositions, 6–7, 42–3, 249–50, 259–60, 286, 288 see individual propositions Provisional Regulation 1986, 181–2, 193, 269 quantitative easing, 79, 114–17, 153–5, 158–60, 279–80 reforms Central bank, 52–5, 255–8, 266 law, 8, 221–2, 290 legal, 73–5, 89, 110–12, 126, 178–80, 250, 255–8, 259, 270–1, 276 market-oriented, 5–7, 25, 40, 106, 176–8, 186, 218–22, 241, 273–5 regulation and supervision approaches, 71–2, 96, 108, 126–8, 133, 163–4, 221–2, 245–7, 260–1, 262–3 conduct of business, 127, 133, 191, 246, 256, 263, 290 macro-prudential, 53–4, 90–3, 95, 126–31, 163, 229, 263, 273–5, 278, 290 micro-prudential, 96, 129, 142, 244, 262–3 principles-based, 107–9, 155, 163, 221–2, 262 proactive, 7, 127, 164–5, 185–6, 207, 220, 253 prudential, 21–2, 27–9, 52, 72–3, 74–5, 88–9, 95, 107–8, 229–30, 246–7, 272–3, 276–7 risk-based, 72, 74–5, 108–9, 246–7, 262 rule-based, 163–4, 155, 221, 230 regulatory objectives, 96, 107, 128, 189, 192, 194, 245–6 re-regulation, 273, 282 resilience, systemic, 8, 127–8, 131, 209 rules by central bankers, 266, 270–1 by law, 179 of law, 266, 270–2, 281–2 making, 8, 28, 90, 102, 191, 221–2, 225 by man, 179 Secondary Banking Crisis, 101 securitisation, 47–8, 203, 220–1, 230 shadow political hierarchy, 197, 228, 231 sovereign debt crisis, 50, 51, 84, 289 State Council Decision 1983, 181, 193, 269 Sterling Monetary Framework (SMF), 105–6, 111, 116–17, 120, 133, 134, 251 stress test, 87, 89, 90–1, 108, 128, 163, 219 subprime mortgage crisis, 45–6, 47–50, 78, 114, 121, 155, 203–5, 252 synergies, 2, 22 systemic regulator, 8, 92–3, 123–4, 134, 190–1, 263–4 systemic risk, 21–3, 53–4, 88–91, 126–8 see also contagion too big to fail, 83–5, 134, 250 trade-offs, 2, 19, 22, 61, 107 transition, economic, 162, 179–80, 221, 228, 233 transmission channels of monetary policy, 21, 169, 290 of risk, 21, 201–3, 252 transparency, 31–2, 92, 95–6, 111, 129, 143, 179–80, 218, 247–9, 288–9 see also information disclosure Treasury–Federal Reserve Accord 1951, 66, 73, 74, 248, 267 triangular relationship, 94–5, 134, 169–70, 258, 277, 280, 287 tripartite, 7, 108–9, 121–4, 124–7, 246 twin-peak, 98, 127–31, 256, 263, 290 two-tier banking system, 101–2 Index two-tier relationship/two tiers, 4, 7, 16, 19–20, 32, 37–8, 42–3, 74, 94–5, 110–12, 134, 150–2, 192–8, 249–50, 258–9, 264–5, 271–2, 275–7, 278, 280, 282–3 see also core value of central bank; individual propositions of central banks umbrella regulator, 64–6, 67–7, 202, 225, 244 319 unconventional monetary policies (UMPs), 23, 52–4, 77, 95, 113, 153, 167, 252–5, 260, 279–80, 290 window guidance, 17, 129, 177–9, 210, 224, 232 WTO, 170–2, 174, 175 Zhou, Xiaochuan, 205 ... is available from the British Library Library of Congress Cataloging-in-Publication Data Ha, Miao, 1982– Central bank regulation and the financial crisis : a comparative analysis / Miao Han pages... cm.—(Palgrave Macmillan studies in banking and financial institutions) Includes bibliographical references Banks and banking, Central – Case studies Banks and banking, Central – Law and legislation... Central Banks 40 Part II Case Studies US Federal Reserve System and the Global Financial Crisis 53 Bank of England and the Global Financial Crisis 89 Bank of Japan and the Global Financial Crisis