Central Banks Need Redefined Role

By Morris, From Bailey | The Independent (London, England), June 12, 1994 | Go to article overview
Save to active project

Central Banks Need Redefined Role


Morris, From Bailey, The Independent (London, England)


LET US start with the proposition that central bankers and other regulators of the international financial marketplace are dinosaurs. Their failure to adapt to the sophisticated technology, increasing complexity and growing opaqueness of global markets will render many extinct. On the other hand, changing climates also can produce remarkable evolutions and that is the challenge faced by central bankers and the increasingly less relevant banks that they regulate.

It seemed entirely appropriate for the world's 103 leading banks to gather in London last week during the 300th anniversary celebration of the Bank of England to ponder their collective futures. On the one hand, their traditional deposit-taking, credit-gathering franchises have been rendered nearly obsolete by the proliferation of non-banks - finance companies, insurance companies, mutual funds and others - that perform similar functions. However, most of these big bank players have adapted with remarkable agility to the aggressive new world of risk-taking, in which derivatives and other sophisticated financial products play a starring role. As Sir Dennis Weatherstone, chairman of this year's International Monetary Conference (IMC), stated in his opening remarks: "To measure, manage and accept risk is our challenge." The big question for banks is will regulators allow them a level playing field on which to compete?

From the regulators' point of view, the movement of the traditional deposit-takers and others into the uncharted world of derivatives is both frightening and positive. An important function of central banks is to guard against systemic risk. Yet most of their safety mechanisms are tailored to a pre-derivatives world. The huge losses generated by hedge funds send shudders through the system, and the ultra vires cases involving UK local authorities glaringly expose some of the holes. Inevitably, central bankers must ask themselves central questions: do they have enough knowledge to prevent a systemic breakdown? What happens to the system if a big non-regulated player folds? Would central banks intervene to save a huge investment bank such as Goldman Sachs, which is not under their purview?

According to Alan Greenspan, chairman of the US Federal Reserve Board, there are no solid answers. Mr Greenspan told IMC delegates that the system is now so complex that the ability of central banks to contain volatility by imposing more regulation is doubtful. He repeated his call for more sophisticated self- regulation of financial institutions, because "government regulators can no longer do that job". This would mean the gradual reduction of the direct supervision of risk by central banks to a role of monitoring internal risk-management systems. Implicit in Mr Greenspan's remarks is an acknowledgment that derivatives can play a positive role - distributing risk throughout the global system in a relatively controlled manner.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Central Banks Need Redefined Role
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?