-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)}
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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 its 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)
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REQUIRED SECTION in Chapter and lecture:
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CENTRAL BANKS: GOALSONE 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)
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USA FED
The USAs Central Bank is called the FED (for the Federal Reserve System)
THIS following SECTION IS NOT REQUIRED FOR STUDENTS (excessive detail on USAs 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
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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
Feds 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 THE ECB {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
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*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
