Its rapid evolution since may have changed the linkages between central counterparties and the rest of the financial system. Against the backdrop of these trends, this article discusses how, and through which mechanisms, central clearing might have affected systemic risk. G01, G14, G18, G The shift to central clearing is a key element of financial system reforms in the aftermath of the Great Financial Crisis.
In response to the global crisis, many countries are implementing — or at least considering — reforms concerning the role of the central bank in banking supervisory regimes. The Dodd-Frank Act increases the role of the Fed as a banking supervisor.
In Europe policymakers moved to finalise reforms of the central bank involvement in supervision both at international and national levels Phillips In the European Commission enacted a proposal for the establishment of a European System Risk Council for macro prudential supervision.
In the German government expressed its willingness to dismantle the unique financial supervisor BAFIN in favour of the Bundesbank. In June the UK government unveiled a reform of the bank supervisory system aimed at consolidating power within the Bank of England. Is the trend reversing?
Before the crisis, the trend in supervisory structures was in the opposite direction, i. In light of the recent financial turmoil, it is unquestionable that decisions concerning how to assign supervisory tasks should pay strong attention to interactions between the responsibility in monitoring banking activity and the role of the central bank.
Yet the economic literature has not provided Central banking recent trends and debates clear-cut indications of the optimal way of assigning supervision.
Indeed, central banks may face conflicts related to financial stability see among others Pomerleano The main argument in favour of the involvement of the central bank in supervision is linked to the positive effect stemming from information gains.
But these considerations go against another argument, often made in the literature, that the intertwined implementation of monetary policy and banking supervision can be costly for different reasons.
First of all, any extension of the central bank powers in the field of supervision can increase endogenously the moral hazard risks and consequently the risks of accommodative monetary actions. If a central bank is empowered with excessive discretion to monetise financial distress, a systemic risk will be more likely to emerge, derailing both monetary and financial stability.
Secondly, the risk of reputational losses may be likely to increase if the central bank is deeply involved in supervision, while the reputational benefits are less likely to emerge, given the nature of the supervision policies, where failures are more visible than successes.
In order to avoid reputational losses the central bank is more likely to accommodate bailout pressures using the liquidity tools. Unravelling the trade-off In other words the cons of the central bank involvement in supervision are crucially based on the view that the temptation of relaxing monetary policy standards in order to mitigate financial sector problems may in turn exacerbate both financial and monetary instability.
Policymakers therefore face a trade-off between expected benefits and costs in determining the central bank involvement in supervision.
In a recent empirical analysis Dalla et al. We focus our attention on the key feature of the monetary regime which crucially shapes the relationship between the governments and the central banks, i. From its origins the central bank independence has been considered a significant determining factor for macroeconomic performances and monetary policy choices for complete and recent surveys see Cukierman and Alesina and Stella The literature also highlights the political and institutional factors which can influence the effectiveness of the central bank independence Acemoglu et al.
Recently the debate has focused on how the financial crisis can threaten central bank independence itself see Buiter and Baldwin Operational independence, supervision, and statutory goals Our empirical study sheds light on two basic facts.
We explain our result through the willingness of benevolent governments of not assigning supervision to central banks because these could make an instrumental use of monetary policy as a means to hide supervisory mismanagement.
Second, we provide evidence that a peculiar feature of political independence, namely the presence of clearly measurable statutory goals, can affect the way central banks tie their own hands in terms of the use of monetary policy and therefore provides more supervisory power assignment to the latter.
Assigning supervision to highly operationally autonomous agencies might be a risk for policymakers. The financial crisis has stressed the importance of overseeing systemic risks.
In order to carry out macro prudential supervisory tasks, information on the economic and financial system as a whole is required. The view is gaining momentum that central banks are in the best position to collect and analyse this kind of information, given their role in managing monetary policy both in regular and in exceptional times through lending of last resort.
They can also presume that the potential costs of central bank involvement are smaller compared to those related to micro supervision.
In other words, the separation between micro and macro supervision can be used to reduce the arguments against central bank involvement. How does the level of central bank independence come into play?
Both in the EU and the UK, independent central banks are committed to monetary stability. The same reasoning can be applied to the cases of Germany and Ireland, which both belong to the Eurozone. On the one side, their central banks no longer have the full responsibilities for monetary policy, yet on the other side they are members of a monetary regime with an independent central bank committed to monetary stability.
Both elements go in the same direction, i. In the US however, we have an operationally independent central bank without any clearly measurable statutory goal. Our view suggests that the risks of policy misallocation are higher in this case. The behaviour of US lawmakers can be classified either as outliers — i.
We therefore argue that the recent episodes of greater central bank involvement in supervision through the macro responsibility assignment seem to be more of an evolution of central bank specialisation as a monetary agent rather than a reverse trend towards de-specialisation.
Who is the recapitaliser of last resort for the ECB?Central Banking: Recent Trends and Debates Central Bank Independence The term autonomy, or independence, in context of Central Banks, refers to how freely the monetary policy makers can conduct policies with little or no interference from the government.
Central Banking: Recent Trends and Debates Central Bank Independence The term autonomy, or independence, in context of Central Banks, refers to how freely the. Banking Industry Point of View Key Trends and Challenges Finance industry is going through a massive transition Accenture research based on Bankenverband and respective Central Bank data, Dec.
Average margin is declined given the current serious market challenges, banks must develop and implement innovative document-management. PwC. Central banking Ahead of the curve. 3. Central banks are scanning a new. and uncertain landscape.
Many commentators believe that the era of. Reflections on Central Banking: That Is Where the Money Is. Edwin M. Truman.
giving Neil Irwin a title f or his recent book. trends.) Debates about managing asset price bubbles were as close as central banks came to focusing on financial stability.
Most of them rejected the idea that they had any ex ante role in. Remarks by Chairman Alan Greenspan The debates, before and since, over the issue of our money standard have mirrored the deliberations on the manner in which we have chosen to govern ourselves, and, perhaps more fundamentally, debates on the basic values that should govern our society.
Not surprisingly, the evolution of central .