Showing posts with label self-regulation. Show all posts
Showing posts with label self-regulation. Show all posts

Jun 30, 2009

Central Bank Risk Management

Facing 2009, leads us back 300 years in history, when funding 'credit demand' was one of the main reasons for founding Central Banks in England (1694), the USA (1790) and the Netherlands (1814).

Let's go back in history and have a short look at the situation in the Netherlands 200 years ago...

More history DNB
English, Dutch

Monetary Stability

Nowadays the importance of monetary stability is just as important as a few eras ago. It cannot be underestimated.

The years of the gold standard are behind us. Question is: are there any stable new alternatives?

Learning from the past, one way or the other, we will have to introduce new trustful standards. Maintaining the current situation will probably not lead to a sustainable financial system on the long term.

To stress the importance of a stable standard, just take a look at the development of the next Federal Reserve Balance Sheet:

The above graph clearly shows that Central Bank Risk Management is not an unimportant issue....

Fed Example
Example: As more 'bad loans' and up on the U.S. federal balance sheet, to prohibit downgrade U.S. credit rating , the FED - one way or the other - will have to standardize itself.

Central Banks are monitoring themselves
The past has shown that self-regulation in private financial markets doesn't work. Be confident, it won't work on a Central Bank level either: balance size figures and federal stakeholder interests have grown to enormous proportions.

Central Banks are in fact regulating and monitoring themselves and - except for the Eurosystem - they don't fully comply to international accounting standards as well, a risk society clearly cannot permit itself.

Split up Central Banks
To regain control of central banks, governments will have to split their Central Banks into:
  • A regular "Reserve Bank" (monetary function) and a
  • An objective independent Regulator, that regulates private banks as well as the State Bank.

If a Central Bank is also operating as a State Bank, this Bank should also be separated from the Reserve Bank business, to guaranty an objective monetary policy by the Reserve Bank in a specific country.

In the mean time, Central Banks will have to become innovative and come up with a collectively supported new standard alternative. They have to act fast, before the market creates his own new wild and probably risky standards out the financial market chaos.

Actuaries and Economists could work together to develop such a stable risk-free standard.