Why Study Central Bank Governance

Apart from the main function of monetary policy formulation and implementation, Arnold (2008), also gives other functions of the Federal Reserve System which include supplying the economy with paper money (Federal Reserve notes) in addition to serving as the lender of last resort. Being the last means that when other banks, especially the commercial banks, suffer from cash management or liquidity

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

A central bank is an independent national authority that conducts monetary policy, regulates banks, and provides financial services including economic research. Its goals are to stabilize the nation's currency, keep unemployment low and prevent inflation.

The Federal Reserve System is the most powerful institution in the United States economy. Functioning as the central bank of the United States, acting as a regulator, the lender of last resort, and setting the nation’s monetary policy via the Federal Open Market Committee, there is no segment of the American economy unaffected by the Federal Reserve [endnoteRef:1]. This power becomes even more substantial in times of “unusual and exigent circumstances,” as Section 13(3) of the Federal Reserve Act gives authority to the Board of Governors to act unilaterally in lending and market making operations during financial crisis[endnoteRef:2]. As illustrated by their decision making in the aftermath of the 2007-2008 Great Recession,

The federal government responded to the crisis that affected businesses and Industries many ways. The Federal Reserve has been most successful in its double full-employment, low inflation mandate when it relies on fixed rules, and keenly looks on the intermediate term rather than trying to respond to short-term developments under political pressure. A number of policies were resolved to react on the emphasis of intermediate term stability on the handling of the

United States Federal Reserve system, also known as Federal Reserve or simply “Fed” is the United States central banking system. The Federal Reserve took inception in 1913, after the adoption of the Federal Reserve Act. The United States Congress has mandated three macroeconomic objectives to the Federal Reserve. These are minimum levels of unemployment, prices stability and keeping in check the rates of interests. Over the years, the role of Federal Reserve has expanded. It now formulates the country’s monetary policies, conducts supervision and regulation of the banking institutions, maintenance of the financial

Congress has handed over the responsibility for monetary to the Federal Reserve, also known as the Fed, but retains oversight responsibilities in order to ensure that the Federal Reserve adheres to the statutory mandate of stable prices, moderate long-term rates of interest, as well as, maximum employment (Labonte, 2014). The responsibilities of the Fed as the country’s central bank are classified into four: monetary policy, supervision of particular types of banks and financial institutions for soundness and safety, provision of emergency liquidity through the function of the lender of last resort, and the provision of services of the payment system to financial institutions, as well as, the government (Labonte, 2014). The monetary role of the Federal Reserve necessitates aggregate demand management. The Federal Reserve defines monetary policy as the measures it undertakes in order to influence the cost and availability of credit and money to enhance the objectives mandated by Congress, which is maximum sustainable employment and a stable price level (Appelbaum, 2014). Since the expectations of businesses as capital goods purchasers and households as consumers exert an essential influence on the main section of spending in America, and the expectations are influenced in essential ways by the Federal Reserve’s actions, a wider definition would involve the policies, directives, forecasts of the economy, statements, and other actions by the Federal Reserve, particularly those

Financial crisis is really a major concern for all economies in the world. Every time a crisis occurs, companies, banks and financial institutions should draw their own lessons, because if the lessons are not recognized, they may still go on the trail of failure of

The financial crisis that happened during 2007-09 was considered the worst financial crisis in the world since the great depression in the 1930s. It leads to a series of banking failures and also prolonged recession, which have affected millions of Americans and paralyzed the whole financial system. Although it was happened a long time ago, the side effects are still having implications for the economy now. This has become an enormously common topic among economists, hence it plays an extremely important role in the economy. There are many questions that were asked about the financial crisis, one of the most common question that dragged attention was ’’How did the government (Federal Reserve) contributed to the financial crisis?’’

The banking crisis of the late 2000s, often called the Great Recession, is labelled by many economists as the worst financial crisis since the Great Depression. Its effect on the markets around the world can still be felt. Many countries suffered a drop in GDP, small or even negative growth, bankrupting businesses and rise in unemployment. The welfare cost that society had to paid lead to an obvious question: ‘Who’s to blame?’ The fingers are pointed to the United States of America, as it is obvious that this is where the crisis began, but who exactly is responsible? Many people believe that the banks are the only ones that are guilty, but this is just not true. The crisis was really a systematic failure, in which many problems in the

The recent financial crisis has a huge impact on systemic Important Financial Institutions; it’s distressing effect can be felt in almost every business area and process of a bank. A fairly large literature investigates the impact of financial crisis on large, complex and interconnected banks. The great recession did affect banks in different ways, depending on the funding capability of each bank. Kapan and Minoiu (2013) find that banks that were ex ante more dependent on market funding and had lower structural liquidity reduced supply of credit more than other banks during crisis. The ability of banks to generate interest income during the financial crisis was hampered because there was a vast reduction in bank lending to individuals and

In 2008, the world experienced a tremendous financial crisis which is rooted from the U.S housing market. Moreover, it is considered by many economists as one of the worst recessions since the Great Depression in 1930s. After bringing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It ruined economies, crumble financial corporations and impoverished individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brothers and AIG. These collapses not only influenced own countries but also international scale. Hence, the intervention of governments by changing and expanding the monetary

This chapter is about the background of 2007-2008 financial crisis. The 2007-2008 financial crisis has a huge impact on US banking system and how the banks operate and how they are regulated after the financial turmoil. This financial crisis started with difficulty of rolling over asset backed commercial papers in the summer of 2007 due to uncertainty on the liquidity of mortgage backed securities and questions about the soundness of banks and non-bank financial institutes when interest rate continued to go up at a faster pace since 2004. In March 2008 the second wave of liquidity loss occurred after US government decided to bailout Bear Stearns and some commercial banks, then other financial institutions took it as a warning of financial difficulty of their peers. In the meantime banks started hoarding cash and reserve instead of lending out to fellow banks and corporations. The third wave of credit crunch which eventually brought down US financial system and spread over the globe was Lehman Brother’s bankruptcy in August 2008. Many major commercial banks in US held structured products and commercial papers of Lehman Brother, as a result, they suffered a great loss as Lehman Brother went into insolvency. This panic of bank insolvency caused loss of liquidity in both commercial paper market and inter-bank market. Still banks were reluctant to turn to US government or Federal Reserve as this kind of action might indicate delicacy of

CBL is the primary institution which overlooks the inaction of the monetary policy in the country. While CSL ensures that the key policy decisions are taken and implemented, they also play a role of the regulator to the country’s banks and other such institutions. CBL website (2010) indicates the key tools they use for the purpose:

The Central banks in the 1600’s performed mainly one function, to act as the government’s bank. This function particularly was used to finance wars. An example, such as, King William of Orange utilized the central bank to finance his wars. Other rulers utilized the central bank to stabilize the economy and financial system. Our famous legendary warriors lead the central banks to become more regulated. Today, the central bank is highly regulated by the government. Also, today nearly every country in the world functions with a central bank system. As the importance of a stable economy and reliable government grows, there has been more of a need for central banks; especially among developing countries. Since times have changed, the central banks are no longer seen as a way to finance wares. Today, when a country is under tough hardship between other countries, the central banks can be affected. An article that perfectly describes this issue is stated on Reuters. Recently, Russia has been flooding the news with its action of invading Ukraine. This has caused major macroeconomic problems for Ukraine, such as, the destabilizing of the Ukraine banks. The article states, “Moscow has raised its prices it charges Kiev for gas by 80%.” (Yukhananov, 2014) This has caused Ukraine “to receive a two-year, $14 billion loan package in exchange for implementing tough economic