《次贷危机》（英文版）The First Global Financial Crisis of the 21st Century.pdf_P36-P40

26 The First Clobal Financial Crisis of the 2 1st Century ing financial markets and no prices for financial instruments during times of crisis, computing the market value of a banks asset is almost impossible. Because a bank will go to the central bank for a direct loan only after exhausting all oppor tunities to sell its assets and borrow from other banks without collateral. the need to seek a loan from the government draws its solvency into question. 3 Deposit insurance Deposit insurance operates in a way that contrasts sharply with the lender of last resort. A standard system has an explicit deposit limit that protects the banks liability holders - usually small depositors- from loss in the event that the bank fails. Guarantees are financed by an insurance fund that collects premiums from the banks. Logic and experience teach us both that insurers have to be national in scope and backed, implicitly if not explicitly, by the national government trea sury's taxing authority. Funds that are either private or provided by regional governments are simply incapable of credibly guaranteeing the deposits in the entire banking system of a country But as I suggested at the outset, deposit insurance has its problems. We know that insurance changes people's behaviour Protected depositors have no incentive to monitor their bankers behaviour. Knowing this, bankers take on more risk than they would normally, since they get the benefits while the government assumes the costs. In protecting depositors, then, deposit insurance encourages creates moral hazard- something it has in common with the lender of last resort Which is better? How can we figure out whether the lender of last resort or deposit insurance works better? A physical scientist faced with such a question would run a controlled experiment, drawing inferences from variation in experimental condition Monetary and financial policy-makers cannot do this. Imagine a statement announcing a policy action beginning something like this: ' Having achieved our stabilization objectives, we have decided to run an experiment that will help us with further management of the economic and financial system. There is an alternative to irresponsible policy experiments: figuring out which policies are likely to work best requires us to look at the consequences of differ ences that occur on their own. Comparing the mid-September 2007 bank run experienced by a UK mortgage lender, Northern Rock, with recent events in the United States provides us with just such a natural experiment The US example is typical of how the loss of depositors' confidence, regardless of its source, can lead to a run. The Abacus Savings Bank serves large numbers of Chinese immigrants in New York, New Jersey and Pennsylvania. In April 2003 news spread through the Chinese-language media that one of the bank's New York was set at 5.25%, the Federal Reserve Bank of New York reported an intra-day high oi 1s% n the lending rale

ing financial markets and no prices for financial instruments during times of crisis, computing the market value of a bank’s asset is almost impossible. Because a bank will go to the central bank for a direct loan only after exhausting all opportunities to sell its assets and borrow from other banks without collateral, the need to seek a loan from the government draws its solvency into question.3 Deposit insurance Deposit insurance operates in a way that contrasts sharply with the lender of last resort. A standard system has an explicit deposit limit that protects the bank’s liability holders – usually small depositors – from loss in the event that the bank fails. Guarantees are financed by an insurance fund that collects premiums from the banks. Logic and experience teach us both that insurers have to be national in scope and backed, implicitly if not explicitly, by the national government treasury’s taxing authority. Funds that are either private or provided by regional governments are simply incapable of credibly guaranteeing the deposits in the entire banking system of a country. But as I suggested at the outset, deposit insurance has its problems. We know that insurance changes people’s behaviour. Protected depositors have no incentive to monitor their bankers’ behaviour. Knowing this, bankers take on more risk than they would normally, since they get the benefits while the government assumes the costs. In protecting depositors, then, deposit insurance encourages creates moral hazard – something it has in common with the lender of last resort. Which is better? How can we figure out whether the lender of last resort or deposit insurance works better? A physical scientist faced with such a question would run a controlled experiment, drawing inferences from variation in experimental conditions. Monetary and financial policy-makers cannot do this. Imagine a statement announcing a policy action beginning something like this: ‘Having achieved our stabilization objectives, we have decided to run an experiment that will help us with further management of the economic and financial system...’ There is an alternative to irresponsible policy experiments: figuring out which policies are likely to work best requires us to look at the consequences of differences that occur on their own. Comparing the mid-September 2007 bank run experienced by a UK mortgage lender, Northern Rock, with recent events in the United States provides us with just such a natural experiment. The US example is typical of how the loss of depositors’ confidence, regardless of its source, can lead to a run. The Abacus Savings Bank serves large numbers of Chinese immigrants in New York, New Jersey and Pennsylvania. In April 2003 news spread through the Chinese-language media that one of the bank’s New York 26 The First Global Financial Crisis of the 21st Century 3 Another flaw in the Bagehot framework is that banks appear to attach a stigma to discount borrowing. For example, in over one-third of the days between 9 August and 21 November 2007 there were federal funds transactions reported at rates in excess of the discount lending rate. In one case, on 25 October 2007 when the lending rate was set at 5.25%, the Federal Reserve Bank of New York reported an intra-day high of 15%

The subprime series, part 2: Deposit insurance and the lender of last resort 27 City managers had embezzled more than Slm. Frightened depositors, unfamiliar with the safeguards in place at US banks, converged on three of the institutions branches to withdraw their balances. Because Abacus Savings was financiall ound, having recently concluded its annual government examination, it was able to meet all requested withdrawals during the course of the day. In the end, as a US Treasury official observed, the real danger was that depositors might be robbed carrying large quantities of cash away from the bank. Leaving their funds in the bank would have been safer. But rumour and a lack of familiarity with govern- ment-sponsored deposit insurance- Federal Deposit Insurance insured every depositor up to $100, 000-caused depositors to panic. Contrast this with the recent UK experience, where deposit insurance covers 100% of the first 2,000 and 90% of the next 33,000, and even then payouts can take months. Under these circumstances, the lender of last resort is an important component of the defence against runs. s Central banks are extremely wary of taking on any sort of credit risk; in some cases there may be legal prohibitions against it. In lending operations, this trans- lates into caution in the determining the acceptability of collateral. And here is where the problem occurs. In order to carry out their responsibility, central bankers must answer two important questions. First, is the borrower solvent? Second, are the assets being brought as collateral of sufficient value? The Northern Rock case brings the weaknesses of this system into stark relief. The broad outlines of the case are as follows. Northern Rock is a mortgage lender that financed its long-term lending with funds raised in short-term money mar- kets. When, starting in mid-August 2007, the commercial paper markets came under stress, Northern Rock started having trouble issuing sufficient liabilities to support the level of assets on its balance sheet. The natural move at this point was to seek funds from the Bank of England. But lending requires that the answer to the two questions about solvency and collateral quality are both yes. Were they for Northern Rock? I have no idea. Some combi- nation of people in the Bank of England and the UK Financial Services Authority may have known, but I wonder. Since Northern Rock is rumoured to have had exposure to American subprime mortgages, securities for which prices were nearly impossible to come by it is no exaggeration to suggest that no one was in a posi- tion to accurately evaluate solvency. As for the value of the collateral, again it was likely very difficult to tell 4 See James Barron(2003), Chinatown Bank Endures Run as Fear Trumps Reassurances, New York Times, 23 April 5 For an exhaustive description of deposit insurance systems in the EU see Robert A Eisenbeis and George G 006),Cross-Border Banking: Challenges for Deposit Insurance and Financial Stability in the European Union, Federal Reserve Bank of Atlanta Working Paper 2006-15(October). 6 As an episode 20 years ago demonstrates, the Federal Reserve turns out to have substantial discretion in ans ng these questions. On 20 November 1985, a software error prevented the Bank of New York(BONY) from eping track of its Treasury bond trades. For 90 minutes transactions poured in, and the bank accumulated ONY aving the funds. But when the time came to deliver the securities and collect from the buyers, BONY emple nation had been erased. By the end of the day, BoNY had bought and failed to deliver so many securities that it as committed to paying out $23 billion that it did not have. The Federal Reserve stepped in and made an ernight loan equal to that amount, taking virtually the entire bank- buildings, furniture and all - as collateral See the discussion in Stephen G Cecchetti (2008), Money, Banking and Financial Markets, 2nd edn, Boston, MA: McGraw-Hill Irwin

City managers had embezzled more than $1m. Frightened depositors, unfamiliar with the safeguards in place at US banks, converged on three of the institution’s branches to withdraw their balances. Because Abacus Savings was financially sound, having recently concluded its annual government examination, it was able to meet all requested withdrawals during the course of the day. In the end, as a US Treasury official observed, the real danger was that depositors might be robbed carrying large quantities of cash away from the bank. Leaving their funds in the bank would have been safer. But rumour and a lack of familiarity with government-sponsored deposit insurance – Federal Deposit Insurance insured every depositor up to $100,000 – caused depositors to panic.4 Contrast this with the recent UK experience, where deposit insurance covers 100% of the first 2,000 and 90% of the next 33,000, and even then payouts can take months. Under these circumstances, the lender of last resort is an important component of the defence against runs.5 Central banks are extremely wary of taking on any sort of credit risk; in some cases there may be legal prohibitions against it. In lending operations, this translates into caution in the determining the acceptability of collateral. And here is where the problem occurs. In order to carry out their responsibility, central bankers must answer two important questions. First, is the borrower solvent? Second, are the assets being brought as collateral of sufficient value?6 The Northern Rock case brings the weaknesses of this system into stark relief. The broad outlines of the case are as follows. Northern Rock is a mortgage lender that financed its long-term lending with funds raised in short-term money markets. When, starting in mid-August 2007, the commercial paper markets came under stress, Northern Rock started having trouble issuing sufficient liabilities to support the level of assets on its balance sheet. The natural move at this point was to seek funds from the Bank of England. But lending requires that the answer to the two questions about solvency and collateral quality are both yes. Were they for Northern Rock? I have no idea. Some combination of people in the Bank of England and the UK Financial Services Authority may have known, but I wonder. Since Northern Rock is rumoured to have had exposure to American subprime mortgages, securities for which prices were nearly impossible to come by, it is no exaggeration to suggest that no one was in a position to accurately evaluate solvency. As for the value of the collateral, again it was likely very difficult to tell. The subprime series, part 2: Deposit insurance and the lender of last resort 27 4 See James Barron (2003), ‘Chinatown Bank Endures Run as Fear Trumps Reassurances’, New York Times, 23 April. 5 For an exhaustive description of deposit insurance systems in the EU see Robert A. Eisenbeis and George G. Kaufman (2006), ‘Cross-Border Banking: Challenges for Deposit Insurance and Financial Stability in the European Union’, Federal Reserve Bank of Atlanta Working Paper 2006-15 (October). 6 As an episode 20 years ago demonstrates, the Federal Reserve turns out to have substantial discretion in answering these questions. On 20 November 1985, a software error prevented the Bank of New York (BONY) from keeping track of its Treasury bond trades. For 90 minutes transactions poured in, and the bank accumulated and paid for US Treasury bonds, notes and bills. Importantly, BONY promised to make payments without actually having the funds. But when the time came to deliver the securities and collect from the buyers, BONY employees could not tell who the buyers and sellers were, or what quantities and prices they had agreed to – the information had been erased. By the end of the day, BONY had bought and failed to deliver so many securities that it was committed to paying out $23 billion that it did not have. The Federal Reserve stepped in and made an overnight loan equal to that amount, taking virtually the entire bank – buildings, furniture and all – as collateral. See the discussion in Stephen G. Cecchetti (2008), Money, Banking and Financial Markets, 2nd edn, Boston, MA: McGraw-Hill, Irwin

Subprime series, part 3: Why central banks should be financial supervisors Stephen G Cecchetti Bank for Internationa/ Settlements and CEPr 30 November 2007 he third essay in this four-Part series argues that central banks should have a direct role in financial supervision Central bankers regularly describe price stability as an essential foundation for maximum sustainable growth. Well, financial stability is another one. In fac without a stable, well-functioning financial system, there is no way that an econ omy can flourish. A well-functioning financial system is like the plumbing. When it works we take it for granted; when it does not, watch out. But, as we have seen recently, financial markets and institutions can malfunction at a moment's notice To prevent this, governments regulate and supervise financial institutions and markets. And best practice dictates that financial stability is one of the primary objectives of the central bank. Central banks and financial supervision For over a decade there has been a debate over how to structure government over- sight. What responsibilities should reside in the central bank? Different countries resolve this question differently. In places like Italy, the Netherlands, Portugal, the United States and New Zealand, the central bank supervises banks. By contrast, Australia, the United Kingdom and Japan, supervision is done by an independent authority Is one of these organizational arrangements better than the other? Does one size fit all? The events of the summer and autumn of 2007 shed new light on this question, and my conclusion is that there is now an even stronger argument for placing supervisory authority inside the central bank. As events unfolded through august and September, it became increasingly clear that having the bank supervisors eparated from the liquidity provider placed added stress on the system. t 1 The chronology of events is now well known, so I will not repeat them here. For a discussion of the initial stages, see my description at 'Market Liquidity and Short-term Credit: the Financial Crisis of August 2007

30 November 2007 The third essay in this four-part series argues that central banks should have a direct role in financial supervision. Central bankers regularly describe price stability as an essential foundation for maximum sustainable growth. Well, financial stability is another one. In fact, without a stable, well-functioning financial system, there is no way that an economy can flourish. A well-functioning financial system is like the plumbing. When it works we take it for granted; when it does not, watch out. But, as we have seen recently, financial markets and institutions can malfunction at a moment’s notice. To prevent this, governments regulate and supervise financial institutions and markets. And best practice dictates that financial stability is one of the primary objectives of the central bank. Central banks and financial supervision For over a decade there has been a debate over how to structure government oversight. What responsibilities should reside in the central bank? Different countries resolve this question differently. In places like Italy, the Netherlands, Portugal, the United States and New Zealand, the central bank supervises banks. By contrast, in Australia, the United Kingdom and Japan, supervision is done by an independent authority. Is one of these organizational arrangements better than the other? Does one size fit all? The events of the summer and autumn of 2007 shed new light on this question, and my conclusion is that there is now an even stronger argument for placing supervisory authority inside the central bank. As events unfolded through August and September, it became increasingly clear that having the bank supervisors separated from the liquidity provider placed added stress on the system.1 Subprime series, part 3: Why central banks should be financial supervisors Stephen G. Cecchetti Bank for International Settlements and CEPR 29 1 The chronology of events is now well known, so I will not repeat them here. For a discussion of the initial stages, see my description at ‘Market Liquidity and Short-term Credit: the Financial Crisis of August 2007’

30 The First Clobal Financial Crisis of the 2 1st Century Pros and cons of separation To understand this conclusion let me very briefly summarize the traditional argu- ments for and against separation of the monetary and supervisory authorities. Starting with the former, the most compelling rationale for separation is the potential for conflict of interest. The central bank will be hesitant to impose monetary restraint out of concern for the damage it might do to the banks it supervises. The central bank will protect banks rather than the public interest Making banks look bad makes supervisors look bad. So, allowing banks to fail would affect the central banker /supervisor's reputation In this same vein, Goodhart argues for separation based on the fact that the embarrassment of poor supervisory performance could damage the reputation of the central bank. Monetary policy-makers who are viewed as incompetent have a difficult time achieving their objectives Turning to the arguments against separation, there is the general question of whether a central bank can deal effectively with threats to financial stability with- out being a supervisor. There are a variety of reasons why the answer might be no First and foremost, as a supervisor, the central bank has expertise in evaluating conditions in the banking sector, in the payments systems and in capital markets more generally. During periods when financial stability is threatened, when there is the threat that problems in one institution will spread, such evaluations must be done extremely quickly. Importantly, the central bank will be in a position to make informed decisions bout the tradeoffs among its goals, knowing whether provision of liquidity will jeopardize its macroeconomic stabilization objectives, for example. They are in the best position to evaluate the long-term costs of what may be seen as short-run bailouts. Put another way, appropriate actions require that monetary policy-mak- ers and bank supervisors internalize each others'objectives Separation makes this difficult Second, separation can lead central bankers to ignore the impact of monetary policy on banking-system health. A simple example of this is the potential for cap- ital requirements to exacerbate business-cycle fluctuations. Granted, this seems unlikely, but regardless, the argument goes as follows: when the economy starts to slow, the quality of bank assets decline. This, in turn, reduces the level of capital, ncreasing leverage. Banks respond by cutting back on lending, slowing the econ- omy even further. Combatting this requires that monetary policy-makers take explicit account of banking-system health when making their decisions. And, without adequate supervisory information, there is concern that they might not Most relevant to the recent experience is the fact that in their day-to-day inter actions with commercial banks(and other financial institutions) central bankers need to manage credit risk both in the payments system and in their lending oper ations In the United States, for example, the Federal Reserve allows banks what see both the text and the references in Ben 5. Bermani Central banking and Bank Supervision in the United States, speech delivered at the Allied Social Science Association Annual Meeting, Chicago, Illinois, 5 January 2007 3 See Charles Goodhart (2000), The Organizational Structure of Banking Supervision, Occasional Papers, no. 1

Pros and cons of separation To understand this conclusion let me very briefly summarize the traditional arguments for and against separation of the monetary and supervisory authorities.2 Starting with the former, the most compelling rationale for separation is the potential for conflict of interest. The central bank will be hesitant to impose monetary restraint out of concern for the damage it might do to the banks it supervises. The central bank will protect banks rather than the public interest. Making banks look bad makes supervisors look bad. So, allowing banks to fail would affect the central banker/supervisor’s reputation. In this same vein, Goodhart3 argues for separation based on the fact that the embarrassment of poor supervisory performance could damage the reputation of the central bank. Monetary policy-makers who are viewed as incompetent have a difficult time achieving their objectives. Turning to the arguments against separation, there is the general question of whether a central bank can deal effectively with threats to financial stability without being a supervisor. There are a variety of reasons why the answer might be no. First and foremost, as a supervisor, the central bank has expertise in evaluating conditions in the banking sector, in the payments systems and in capital markets more generally. During periods when financial stability is threatened, when there is the threat that problems in one institution will spread, such evaluations must be done extremely quickly. Importantly, the central bank will be in a position to make informed decisions about the tradeoffs among its goals, knowing whether provision of liquidity will jeopardize its macroeconomic stabilization objectives, for example. They are in the best position to evaluate the long-term costs of what may be seen as short-run bailouts. Put another way, appropriate actions require that monetary policy-makers and bank supervisors internalize each others’ objectives. Separation makes this difficult. Second, separation can lead central bankers to ignore the impact of monetary policy on banking-system health. A simple example of this is the potential for capital requirements to exacerbate business-cycle fluctuations. Granted, this seems unlikely, but regardless, the argument goes as follows: when the economy starts to slow, the quality of bank assets decline. This, in turn, reduces the level of capital, increasing leverage. Banks respond by cutting back on lending, slowing the economy even further. Combatting this requires that monetary policy-makers take explicit account of banking-system health when making their decisions. And, without adequate supervisory information, there is concern that they might not. Most relevant to the recent experience is the fact that in their day-to-day interactions with commercial banks (and other financial institutions) central bankers need to manage credit risk both in the payments system and in their lending operations. In the United States, for example, the Federal Reserve allows banks what 30 The First Global Financial Crisis of the 21st Century 2 For a detailed and very thought-provoking discussion see both the text and the references in Ben S. Bernanke, ‘Central banking and Bank Supervision in the United States’, speech delivered at the Allied Social Science Association Annual Meeting, Chicago, Illinois, 5 January 2007. 3 See Charles Goodhart (2000), ‘The Organizational Structure of Banking Supervision’, Occasional Papers, no.1, Basel, Switzerland: Financial Stability Institute (November)