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Symposium 2013

Solution for The Future of Central Banking and Financial Market Reform

The Challenge

The global financial crisis has revealed regulatory failure in financial markets and demonstrated the urgent need for reform. In particular, it is now widely accepted that in addition to established m ...

The global financial crisis has revealed regulatory failure in financial markets and demonstrated the urgent need for reform. In particular, it is now widely accepted that in addition to established microprudential policies, macroprudential policies aimed at increasing the stability of the financial sector as a whole are imperative. But an active debate has emerged over what role the central bank should play with this augmented set of policies.

Macroprudential regulation should be located at central banks

Central banks have a significant advantage in gathering and processing the information necessary for macroprudential policy. Moreover, recent research suggests that capital ratios are higher and bank credit booms are less prevalent where the central bank is the lead supervisor. Major central banks such as the Federal Reserve, the European Central Bank and the Bank of England have already announced their extended mandate for financial stability. Nonetheless, it must be ensured that structures are in place that deal with the conflicts of interest that arise due to this extended mandate.

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    Central banks should increase the transparency of their decision-making to deal with increased uncertainty and maintain their credibility

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    Unconventional policy measures such as quantitative easing should be communicated as temporary measures rather than a paradigm shift

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    Acknowledge the limitations of monetary policy

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