Han central bank regulation and the financial crisis; a comprehensive analysis (2016)

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Central Bank Regulation
and the Financial Crisis
A Comparative Analysis
Miao Han
Durham University, UK


© Miao Han 2016
Softcover reprint of the hardcover 1st edition 2016 978-1-137-56307-1
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Ha, Miao, 1982–
Central bank regulation and the financial crisis : a comparative
analysis / Miao Han.
pages cm.—(Palgrave Macmillan studies in banking and financial
institutions)
Includes bibliographical references.
1. Banks and banking, Central – Case studies. 2. Banks and banking,
Central – Law and legislation. 3. Monetary policy. 4. Financial crises.

5. Global Financial Crisis, 2008–2009. I. Title.
HG1811.H22 2015
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2015021870


For My Parents
献给我的父母


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Contents
List of Figures

viii

List of Tables

ix

Acknowledgements

xi

List of Abbreviations
1

xii

Introduction

1

Part I

Theoretical Framework

2

Central Banks’ Two-Tier Relationships

13

3

The Global Financial Crisis: The Challenge for Central Banks

40

Part II Case Studies
4

US Federal Reserve System and the Global Financial Crisis

53

5

Bank of England and the Global Financial Crisis

89

6

Bank of Japan and the Global Financial Crisis

124

7

From Centrally Planned Economy to Market-Oriented
Principles: The People’s Bank of China under Change

156

People’s Bank of China and the Global Financial Crisis:
Policy Responses and Beyond

183

8

Part III
9

10

Comparative Analysis

Central Bank Regulation toward Financial Stability:
Convergence, Divergence, or Multiple Pathways?
Evidence from the Comparative Study

217

Conclusion

262

Bibliography

268

Index

315

vii


List of Figures
2.1
2.2
2.3
2.4
3.1
4.1

4.2
4.3
4.4
5.1
5.2
5.3
5.4
5.5
6.1
6.2
6.3
6.4
7.1
7.2
8.1
8.2
8.3
8.4
8.5
9.1
9.2
9.3
9.4

The two-tier relationship governing a central bank
Legal framework of central bank
The role of central banks in maintaining financial stability
Logic of the argument of this book
The originate-and-distribute banking model
The Federal Reserve System

Federal funds effective rates between end of 1999 and
May 2013
Financial regulation and supervision regime under
Dodd–Frank Act
Changed two-tier relationships of the US Fed
UK tripartite model of financial regulation and supervision
BOE bank rates between May 1992 and July 2007
BOE bank rates between July 2007 and March 2013
Nationalisation of Northern Rock under the tripartite model
New UK financial regulation and supervision system
Japan’s new financial regulation and supervision system
Time-series setting of BOJ interest rates between 1998
and 2006
Time-series setting of BOJ interest rates between 2006 and
mid-2013
The BOJ in financial crisis
Financial structure in China in the 1950s
The shadow system of the PBC
Changes in China’s monthly trade and FDI inflows
between July 2008 and January 2010
Composition of PBC’s holdings of US securities in
June 2008
PBC interest rates between March 2007 and December 2008
PBC interest rates between December 2008 and July 2012
The GFC challenge for the PBC
GFC changes government–market nexus
How central banks’ orientations have evolved
Comparison between old and new two-tier relationships
How the GFC challenged central banks

viii

14
29
35
38
45
65
69
84
86
99
102
103
111
119
136
139
143
152
158
180
185
188
189
196
210
252
253
254

255


List of Tables
4.1
4.2
4.3
4.4
5.1
5.2
5.3
5.4
5.5
6.1
6.2
6.3
7.1
7.2
7.3
8.1
8.2
8.3
8.4
9.1
9.2
9.3
9.4
9.5
9.6
9.7

Monetary policy actions authorised under
Federal Reserve Act
Major changes around the US Fed’s two-tier relationship
before the GFC
Classification of facilities and programmes established
by the US Fed during the GFC
Legal framework of the US Fed – changes during the GFC
Major changes around the BOE’s two-tier relationship
before the GFC
BOE’s monetary policy responses during the GFC
BOE balance sheet between November 2006 and
October 2011
Changed facilities for the BOE’s operation in the SMF
Legal framework of the BOE – changes by the GFC
Major changes around the BOJ’s two-tier relationship
before the GFC
Quantitative easing from the BOJ between 2008 and 2013
Monetary policy responses from the BOJ:
2001–2006 vs GFC
China’s financial commitments under the WTO
Major changes of the PBC around its two-tier relationship
Comparison between PBC Law 1995 and PBC Law 2003
Chinese commercial banks’ exposure to US subprime
mortgage securities
Sector breakdown of China’s fiscal stimulus package
China in the AFC and the GFC compared
PBC’s performances at different stages of the GFC
Comparing central bank objectives
Comparing central bank organisational structures

Comparing monetary policy instruments under
legal provisions
Comparing financial regulation and supervision
Comparing central bank independence
Comparing statutory crisis management solutions
Comparing central bank actions and policies in
US, UK, Japan and China during the GFC

ix

63
67
78
87
100
104
105
106
121
137
144
153
171
176
178
186
191
207
209
219

222
224
225
227
230
231


x

List of Tables

9.8
9.9
9.10
9.11
9.12
9.13

Selected financial rescue efforts in China, Japan, UK,
and US from October to December 2008
Comparing legal reforms of four central banks
during the GFC
Comparing legal frameworks and crisis management
solutions in four central banks
National arrangements for financial regulation and
supervision before the GFC
Reforming financial regulation and supervision
during the GFC
Comparing major legal changes to four central banks

before the GFC

232
234
239
240
241
244


Acknowledgements
My warmest and most heartfelt thanks go to Professor Roman Tomasic and
Mr John Ritchie; I am deeply indebted to both of them for their constant
guidance, support and patience. I have benefited from opportunities to
present and discuss my work with scholars with outstanding expertise from
around the world. Their feedback and comments have been valuable to me.
Here, I would like to express my deep gratitude to them.
I am also deeply grateful to all my friends and colleagues for their understanding, tolerance and support. I thank Aimee Dibbens and Grace Jackson
at Palgrave Macmillan for their outstanding patience and hard work, and
also Jen Hinchliffe for language correction, Vidhya Jayaprakash and her
production team for proofs and editing work.
I would like to express my deepest appreciation to my parents, Chijun
Han and Huiying Xue, for their unconditional and consistent love, support,
encouragement and inspiration.

xi


List of Abbreviations
ABCP

ABS
ADB
AFC
AIG
ASEAN
BHC
BIS
BOE
BOJ
BOR
BRIC
CBRC
CDO
CDS
CIRC
CMI
COC
CSRC
DIC
DMO
ECB
EMEs
ESF
EU
FAI
FCA
FDI
FDIC
FHCs
FOMC

FPC
FRB
FRBNY
FRC
FSA

Asset-Backed Commercial Paper
Asset-Backed Security
Asian Development Bank
Asian Financial Crisis
American International Group
Association of Southeast Asian Nations
Bank Holding Company
Bank for International Settlements
Bank of England
Bank of Japan
Bank-Offered Rate
Brazil, Russia, India and China
China Banking Regulatory Commission
Collateralized Debt Obligation
Credit Default Swap
China Insurance Regulatory Commission
Chiang Mai Initiative
Comptroller of the Currency (US)
China Securities Regulatory Commission
Deposit Insurance Corporation
Debt Management Office (UK)
European Central Bank
Emerging Market Economies
Exchange Stabilization Fund (US)

European Union
Fixed Asset Investment
Financial Conduct Authority
Foreign Direct Investment
Federal Deposit Insurance Corporation
Financial Holding Companies
Federal Open Market Committee
Financial Policy Committee
Federal Reserve Bank
Federal Reserve Bank of New York
Financial Reconstruction Commission
Financial Services Authority (UK)

xii


List of Abbreviations xiii

FSA
FSC
FSCS
FSMA
FSOC
GAO
GFC
GSE
IMF
IPCs
IPO
JGB

LDP
Libor
LOLR
MBSs
MNO
MoF
MOU
MPC
MPM
NBFI
NDRC
NPC
NPL
OCC
OECD
OFS
OLA
OMO
OTS
PBC
PM
PRA
PRC
QE
RCC
RMB
SAFE
SDR
SEC

Financial Services Agency (Japan)
Financial Stability Committee (UK)
Financial Services Compensation Scheme
Financial Services and Markets Act
Financial Stability Oversight Council
Government Accountability Office
Global Financial Crisis
Government-Sponsored Enterprise
International Monetary Fund
Individuals, Partnerships and Corporations
Initial Public Offering
Japanese Government Bond
Liberal Democratic Party
London Interbank Offered Rate
Lender of Last Resort
Mortgage-Backed Securities
Multinational Organization
Ministry of Finance (China and Japan)
Memorandum of Understanding
Monetary Policy Committee
Monetary Policy Meeting
Non-banking Financial Institution
National Development and Reform Commission
National People’s Congress
Non-performing Loan
Office of the Comptroller of the Currency
Organisation for Economic Co-operation and Development
Office of Financial Stability (Policy and Research)
Orderly Liquidation Authority
Open Market Operation

Office of Thrift Supervision
People’s Bank of China
Prime Minister
Prudential Regulation Authority
People’s Republic of China
Quantitative Easing
Resolution and Collection Corporation
Renminbi
State Administration of Foreign Exchange
Special Drawing Right
Securities and Exchange Commission (US)


xiv

List of Abbreviations

SIFIs
SIV
SMEs
SMF
SOCB
SOE
SPV
SRR
SRU
TSC
UKFI
UMP
US Fed

WTO
ZIRP

Systemically Important Financial Institutions
Structured Investment Vehicle
Small- and Medium-Sized Enterprises
Sterling Monetary Framework
State-Owned Commercial Bank
State-Owned Enterprise
Special-Purpose Vehicle
Special Resolution Regime
Special Resolution Unit
Treasury Select Committee
UK Financial Investments
Unconventional Monetary Policy
Federal Reserve System of the US
World Trade Organization
Zero Interest Rate Policy (Japan)


1
Introduction

1.1 The global financial crisis as a challenge to
central banks
The first central bank was established in Sweden in 1668, and since then
most countries, whether developed or developing, have set up their own
central banks.1 The inception of central banks has often been linked with
certain tasks delegated to them by their governments, but the role of those
banks in stabilising financial markets has been far from clear. This conundrum – how central banks contribute to financial stability – has come under

the spotlight again because of the far-reaching effects of the global financial
crisis (GFC). Through the mechanism of a comparative study, this book will
examine how the GFC has challenged the role played by central banks in
maintaining financial stability; it argues that this crisis has, amongst other
things, changed central bank regulation2 to strike an improved balance
between government and the market.
In theory, there are a number of explanations concerning how central
banks deal with financial crises, and as illustrated later in the historical
review, some central banks were established for the very purpose of dealing
with stability problems. However, it is still a matter of debate as to how
their role in maintaining financial stability is to be defined. This unanswered
problem has in part been attributed to conceptual confusion, and also to an
unclear relationship between monetary stability and financial stability.

1

According to the Central Bank Hub listed by the Bank for International Settlements
(BIS), central banks from 168 countries and areas (including the European Central
Bank, Hong Kong SAR and Macau SAR) have registered <www.bis.org/cbanks.htm>.
2
‘Central bank regulation’ will be defined in Chapter 2. Here, this concept can
be understood as a set of policy responses from central banks to deal with financial
crises.
1


2

Central Bank Regulation and the Financial Crisis

The meaning of ‘financial stability’ has itself evolved over time, but
without a great deal of consensus being reached. For example, the expression has been defined as the ability of the financial system to facilitate
and enhance economic processes, manage risks and absorb shocks; it
was also seen as a continuum, changeable over time, and consistent with
multiple combinations of financial elements (Schinasi, 2006). At the very
least, financial stability precludes financial crises – though not necessarily change per se – and thus it could roughly be regarded as a period
of time without such crises. Three main approaches may be taken to the
conceptualisation of financial crisis: the monetarist approach, the asymmetric information perspective, and the financial instability hypothesis (Crockett, 1996). For example, cyclical excess could disturb market
participants: a financial crisis is a disruption to financial markets where
adverse selection and moral hazard problems become more intensive,
so that the financial sector fails to channel efficiently the most productive investment opportunities (Mishkin, 1991). To monetarists, errors in
monetary policy lead to instability in the financial system, or produce farreaching negative influences by causing minor disruptions (Friedman and
Schwartz, 1971); this approach has linked the conduct of the central banks
more directly to financial stability. Recently, different theories have been
employed to understand financial crises, including game theory and the
use of asymmetric information (Ferguson, 2003). Overall, therefore, it is
clearly difficult to define a financial crisis as such, but financial markets
have previously developed as a consequence of crises; such crises can be
prompted by different causes and can also take varying forms (Kindleberger
and Aliber, 2011). Alternatively, if a positive correlation can be established
between monetary and financial stability, it is not hard to determine the
role played by a central bank in maintaining financial stability. However,
such a link has not yet been proved, nor any convincing evidence found,
especially with continuing controversy about the synergies or trade-offs
between monetary and financial stability (Padoa-Schioppa, 2002).
It can be challenging to posit a clear-cut link between central banks and
financial stability, but the GFC exposed some leading issues. This crisis arose
from the subprime mortgage risk that had become evident in the US housing
market in 2007, and caused global financial upheavals from 2008 onwards.3
While many factors triggered and/or intensified this crisis (Shiller, 2008),

central banks have been criticised for providing excessive liquidity in the
years running up to the GFC, and also for their inability to mitigate systemic
risk (Taylor, 2009a). Moreover, major central banks launched unprecedented
monetary expansion in the early 2010s, having themselves moved to the
3

The GFC, including causes and its globalisation, will be analysed in Chapter 3.


Introduction 3

centre of crisis management. It is thus argued that central banks have assumed
particular responsibility for dealing with financial stability. It has been said
that: ‘[t]he overall framework [of financial stability] does not appear to have
been fully conducive to achieving its objectives, often leaving ill-defined
the responsibilities and tools of central banks in their pursuit of financial
stability’ (Nier, 2009).
It has been seen that the conduct of the central banks allowed the build-up
to the GFC; at the same time, they were required to provide solutions for it.
With the radical changes that took place in the early 2010s, they were challenged to develop better mechanisms to achieve financial stability. As one
leading commentator observed:
Following the on-going financial crisis, Central Banks are now probably
on the verge of a further, fourth, epoch, though the achievement of a
new consensus on their appropriate behaviour and operations may well
be as messy and confused ... Indeed the financial stability authority would
then, de facto, become the true Central Bank. (Goodhart, 2010)
All these issues have provided a focus for this book’s discussion on how the
GFC challenged central bank regulation and on the efforts of those banks to
maintain financial stability.

1.2

The significance of the question of stability

In contrast to other theoretical and statistical studies which focus more
upon the economic effects of central banking, this book will employ a
more basic theory to identify key legal considerations relevant to central
bank regulation aiming at achieving financial stability. As paper currency
replaced metallic currencies, the central banks became involved in stabilising the financial markets. Through their involvement in the money
supply, their engagement has been further enhanced. The need to maintain
currency values necessitated the establishment of an agency to maintain
public confidence; at the same time, banks as deposit takers began to participate in the wider monetary cycle. So, after being established as an important intermediary between the banking system and the wider economy,
the central bank has gradually developed its core values: at the same time
serving as the government’s banker and as the bankers’ bank (Goodhart,
1995, pp. 205–215). Starting from this core orientation, a central bank is
located within a two-tier relationship, one that simultaneously involves
both the government and the financial markets. The theoretical and legal
framework used here will revolve around these two tiers, and four case
studies will illustrate how the GFC specifically challenged central banks


4

Central Bank Regulation and the Financial Crisis

and their relationships with the government and the financial markets.
It is clear that central bank crisis management is affected by each specific
two-tier relationship.
Central banks were first set up in developed countries in the 17th century,
including the Bank of England (BOE) in 1694; more recently, the Bank of

Japan (BOJ) was established in 1883 and the Federal Reserve System of the
US (US Fed) in 1913. After World War II, new central banks were established
in other (often semi-colonial) countries, including China. However, only
limited written materials are available to help classify them. In this book,
four central banks will be examined from the perspective of their respective
two-tier relationships, and these banks will be categorised according to the
nature of their market or government orientations.
It is necessary to set out some key concepts before the specific propositions are examined. For example, the concepts of ‘state’ and ‘government’
might, in different academic studies, have different meanings and also have
been used interchangeably. Then in international law there is a close relation
between ‘government’ and ‘statehood’. The best known formulation of the
basic criteria for ‘statehood’ is laid down in the Montevideo Convention on
the Rights and Duties of States: ‘The State as a person of international law
should possess the following qualifications: (a) a permanent population; (b)
a defined territory; (c) government; and (d) capacity to enter into relations
with other States’.4 It has also been argued that ‘government’ or ‘effective
government’ is the basis for the independence of states in regard to their
internal and external affairs.5 At the very least, ‘state’ is seen as different from
‘government’: an effective government is one prerequisite for statehood, and
central government is the main – and for most purposes the only – organ
through which the state acts in international relations. In any event, international law distinguishes between changes of state personality and changes
of the government of the state (Crawford, 2006, pp. 31–33, 55–61). In this
book, in distinguishing between the two groups of central banks, ‘government’ will be used in contrast to ‘market’.
The GFC put many different issues into the spotlight. Amongst other things,
the dominance of the prevailing neo-liberal ideology has been questioned;
for example, it has been said that: ‘the onset of the global financial crisis in
2008 has been widely interpreted as a fundamental challenge to, if not crisis
of, neoliberal governance’ (Peck, Theodore and Brenner, 2009). Between the

4

Article 33, Convention on the Rights and Duties of States, Montevideo, 26
December 1933.
5
Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA)
2001: Articles 4–7 for the normal situation of responsibility for acts of State organs or
agencies, and Articles 8–11 for exceptional cases.


Introduction 5

1970s and the 1990s, neo-liberal market-oriented reform became widespread
in the US, the UK, Japan and beyond.6 In principle, classic neo-liberalism
incorporates privatisation, minimal regulation, depoliticisation, and liberalisation (Megginson and Netter, 2001). It has been expected that market principles enable economic units to maintain a temporary imbalance between
incomes and expenditures, adjust the types of claims with diversifying assets
and liquidity, and achieve a sounder payment system to make a wider range
of transactions feasible. Such a market economy cannot be effective without
certain pre-conditions, including: open financial markets; information closure;
no anticipation of bailouts; and a proper set of response mechanisms (Lane,
1993). Furthermore, since market-oriented institutions claim a positive association with economic development, market disciplines are also employed
to reform those institutions, including central banks (Haan, Lundstrom and
Sturm, 2006). In addition, during the period of market-oriented reform, the
government was hard-pressed to balance its welfare and its market-making
roles (Sbragia, 2000). However, neo-liberalism did not develop evenly (Peck,
Theodore and Brenner, 2009), and varies even within East as against West
(Wade, 1990); for example, in Japan it was a tight nexus of government, financial markets (mainly banks) and firms that achieved industrialisation and
economic modernisation, while China explicitly saw its government as the
maker of the markets from the very start of its economic reform.
As regards the financial sector, after the Bretton Woods System came to an
end, fixed exchange rates were gradually liberalised, and government intervention was reduced to necessary regulation (Mascinadaro and Quintyn,
2008). In consequence, while market discipline has become a force whose

effectiveness pervades financial policy, it does not exclude government intervention in markets, especially as regards regulation and supervision (Lane,
1993). In this context, central banking should reflect the true relationship
between the demand for real cash balances and the level of economic activities; hence, effective market orientation is an outcome of the monetary policies that keep overall prices low, as well as of the sound and stable financial
systems which operate to produce positive market rates of interest across
the whole range of financial intermediations (Valdepenas, 1994). Marketoriented central banks help keep prices stable by undertaking a programme
of actions, including interest rate policies, open market operations (OMOs),
quantitative controls, and so forth (Borio, 1997). They make credit and
capital allocation more feasible by conducting due regulation and supervision, and they also control oversight of payment and settlement systems
(Padoa-Schioppa and Saccomanni, 1994, pp. 235–268). However, financial
6

Financial liberalisation in those countries will be introduced in the case studies
later.


6

Central Bank Regulation and the Financial Crisis

liberalisation is by no means a guarantee against financial crises, and such
liberalisation may even enhance fragility of markets (Demirguc-Kunt and
Detragiache, 1998). Financial liberalisation and innovation have blurred the
boundaries between financial markets and the jurisdiction of central banks,
whilst also blurring the traditional distinctions between banks and non-bank
financial institutions; this further challenges the pursuit of financial stability
by central banks (Golembe and Mingo, 1985).
Based on the separation of ‘market’ and ‘government’, this research assumes
that the four selected central banks have different orientations; the countries
earmarked for detailed analysis – especially to determine comparative convergence and divergence – of their central banks include China, Japan, the UK
and the US. In theory, central banks are generally in charge of monetary

policy and financial regulation to some extent; from their respective two-tier
relationships, they are argued to be either market-oriented or governmentcontrolled. Both the US Fed and the BOE were primarily market-oriented;
while the former was a consolidated regulator within a rigid legal framework,
the latter transferred major micro-prudential regulatory duties to an independent outside agency in the late 1990s. They both represent the diffusion
of market-oriented reforms, whereas the BOJ has apparently taken another
direction. Due to long-term subordination to its finance ministry, it was still
under government control after financial liberalisation, and its oversight
was limited to selected but direct monitoring duties at the firm level. China,
meanwhile, having not launched economic reform until 1978, was aiming for
a shift from a highly centralised planning economy to reliance upon market
disciplines. As far as the People’s Bank of China (PBC) is concerned, it remains
(at the time of writing) government-owned and works with other responsible
agencies to directly control China’s partially liberalised financial markets.
So, until the GFC changed the central banks’ two-tier relationships, the
features of these banks can be summarised thus:
●

●

●

●

the US Fed: predominantly a market-oriented or laissez faire central bank; it
was also a consolidated financial regulator based upon rigid legislation;
the BOE: predominantly a market-oriented or laissez faire central bank; it
had limited prudential regulation role in the tripartite model (involving
the BOE, the FSA and HM Treasury);
the BOJ: a government-guided central bank, and a regulator that relied
upon moral suasion with limited functions;

the PBC: a government-owned politically-dominated central bank, and a
proactive regulator as part of China’s financial regulatory regime.

The main question here requires that the above key propositions be examined with reference to our four leading central banks, and I will focus on


Introduction 7

regulation by China’s central bank. As China was one of the first major countries to recover from the spillover effects of the GFC, it might be assumed
that the policy responses from the PBC and beyond were particularly effective. However, this work will show that the GFC challenged the PBC to such
an extent that explicit government intervention could threaten China’s
continuing market-oriented reform.

1.3

Approach

This study combines logical, explanatory, empirical, hermeneutic, exploratory and evaluative methods of analysis (Hoecke, 2011). In essence, it will
involve interdisciplinary comparative research in regard to the four countries selected (Siems, 2014, pp. 7–9).
The study of central banks is inevitably interdisciplinary, drawing upon
insights from a variety of intellectual traditions such as economics, finance,
mathematics, management, law, social science and so on. Of all the interdisciplinary approaches to research, there is an increasingly close link between
law and economics (Arban, 2011; Priest, 1993), and this study will draw on
a legal perspective in its approach to the capacity of the selected central
banks to deal with financial crises. In general, rulemaking and law reform
have developed to modify the way in which financial crises can be dealt
with (Glinavos, 2010). From the beginning of the 20th century, it became
more common to formalise the position of central banks, especially their
relationship with finance ministries, by writing these expectations into
statutes (Kriz, 1948). As central banks have gradually developed their major

functions, statutes have often described monetary stability as their primary
objective, and have also mandated that those banks should support wider
economic development. Furthermore, attitudes to financial regulation have
continued to evolve through different financial crises. As the market-oriented reform spread from the 1970s, after a period of continuous deregulation, the role played by governments in financial markets became restricted
to regulation and supervision – however, it was the flaws in regulation and
supervision that helped trigger the GFC. As a result of that, major statutory
reforms sought to enhance systemic resilience, and at the same time, the
repositioning of central banks as systemic regulators was written into statutes (Glinavos, 2010); examples of this include the Dodd–Frank Wall Street
Reform and Consumer Protection Act (Dodd–Frank Act) in the US, and the
Financial Services Act 2012 in the UK. In sum, it was statutes that, in an
effort to achieve system-wide stability, redefined how central banks can act,
while it was the GFC that prompted significant legal changes.
This research will thus focus upon how laws and rules govern central bank
regulation with regard to systemic stability. To be specific, legal frameworks


8

Central Bank Regulation and the Financial Crisis

are argued to be based upon the two-tier relationship, resulting in certain key
legal provisions; central banks have dealt with financial crises by employing
policy instruments under their respective legal authority (Blinder, 1999,
pp. 25–51). However, it is also argued that many legal issues could not be
properly understood through reliance upon legal doctrine alone (Cryer,
Hervey, Sokhi-Bulley and Bohm, 2011; Posner, 1981). For example, although
the relationship between a central bank and the government – ‘central bank
independence’ in legal terminology – is, similarly, written into statutes, it
is not decided solely by law. As will become evident in the following case
studies, it can vary due to a combination of different factors, including: the

different development stages of domestic markets; the financial resources
available for central banking; and the positions of other governments
engaged in setting and implementing monetary policy, designing other
economic policy objectives, appointing key members, etc. Therefore, I will
examine de jure legal provisions regarding central bank regulation by taking
into account de facto circumstance.
My analysis will start with rule-based legal frameworks, and data has
therefore been collected from diverse sources, including books, journals,
magazines, newspapers, conference papers, reports from international
organisations, and websites of both Western and Chinese origin. It is not
a matter of simple presentation of such materials; rather, I will integrate
different arguments systematically and develop more critical assessments of
their meanings and value. This study will not focus upon data per se, but
employ them to gain first-hand insights into the policy responses from, and
performances of, the four central banks throughout the GFC.
These case studies are country-specific (McConville and Chui, 2007,
pp. 69–132). Particular attention will be given to the PBC; and its historical development, legal framework and policy responses to the GFC are all
examined. This book will also review central bank regulation in the other
three countries. For some time before the GFC, both the US and the UK
had pursued finance-led growth, while financial fragility intensified (Boyer,
2013). The US was the centre of market disturbances during the GFC, with
dramatic losses and policy responses; and the UK followed suit. The US
Fed and the BOE represent what might broadly be described as an AngloAmerican style of central banking, orientated towards key market principles.
China’s economic reform claims to introduce market principles, and thus
the market-oriented US Fed and BOE have important reference value for the
PBC. The BOJ is of particular interest in that its own earlier economic bubble
produced what has been described as its ‘lost decade’, especially after the
GFC, when unprecedented monetary expansion intensified wider economic
uncertainty globally (which Paul Krugman referred to ‘Nipponisation’). Both
the BOJ and the PBC are categorised as government-controlled central banks

Introduction 9

which operate closely under their governments’ guides, and propositions
about them are framed in that light.
There are some distinct advantages to such an approach. First, it has
eliminated the tendency towards an economic analysis of certain monetary
policy instruments and conduct with regard to central bank crisis management. In this study, as previously indicated, the GFC challenge will instead
be examined from a legal perspective of central bank regulation, illustrating
how central banks have managed to focus upon systemic financial stability.
Moreover, such a country-specific case study rejects the conventional preference for the Western model of central banking (Siems, 2014, pp. 35–37), by
including central banks from China and Japan; and hence, a better balanced
can be achieved between West and East. However, it should be noted that the
reliability of data from Chinese authorities has been criticised; it is argued that
due to strict censorship in China, official information can be open to manipulation. Few official publications are available in English, while the Chinese
language allows considerable flexibility in interpreting politically sensitive
topics. To compensate for that problem, this book will embrace information
about China from both inside and outside, such as that from multinational
organisations, and public and private think tanks. For example, country reports
from the BIS, IMF and World Bank will be used to analyse China-relevant
issues, while views from specialist institutions and research centres will be
employed to assess the reliability of Chinese official statements.

1.4

Structure of the argument

In testing the central propositions, I need to consider the issues that can most
effectively be compared in regard to the four different central banks, and the

major comparative study will be presented accordingly. A legal-style framework
has been developed from an analysis of the two-tier relationship governing
central banks, enabling significant differences and similarities to be identified.
This study consists of ten chapters. Chapter 1 will introduce the theoretical
framework. Chapter 2 acknowledges that the central bank serves as both the
government’s banker and the bankers’ bank, and makes this two-tier relationship explicit, with major legal provisions specified. In addition, it sets out
how the central bank is granted crisis management solutions by law, and will
adjust its pre-existing two-tier relationship when dealing with financial instability. Chapter 3 explains how the GFC challenged central banks generally.
Part II contains the four case studies of the US, the UK, Japan and China.
The selected central banks’ proposed orientations will be individually examined according to their respective legal frameworks, and compared with the
changes following the GFC, illustrating how this crisis challenged each of
them. As will be shown, both the US Fed and the BOE renewed their direct


10

Central Bank Regulation and the Financial Crisis

rescue efforts to the markets in cooperation with their governments, whilst
the GFC aroused intense criticism regarding their due regulation and supervision. The BOJ was required to deal with its domestic economic crisis before
the GFC’s spillover effects took hold, and explored further monetary expansion under increased government intervention; it is thus seen as ‘a central
bank in crisis’. In the case of China, the PBC officially assisted its rapid
economic recovery, which was therefore attributed to strong government
intervention; but its long-term negative implications added uncertainty to
the future of China’s market-oriented reform. In brief, the commitments of
these four central banks to their prevailing orientations were changed by the
GFC to varying degrees.
This study will consider China’s central bank in two chapters: the PBC’s
reform is discussed in Chapter 7 and its crisis management solutions are
assessed in Chapter 8. In Chapters 4–6, the relevant legal provisions will be

highlighted by the case studies of the US Fed, BOE, and BOJ, thus enabling
comparison with the legal framework of the PBC after reforms.
Part III will then make the comparisons relating to the case studies
presented in earlier chapters; Chapter 9 will seek to chart key findings,
displaying the patterns of observed convergence and divergence, and tables
will compare these four central banks in terms of their overarching legal
frameworks, crisis management solutions and prompted reforms during the
GFC. Inter alia, detailed comparisons will be made in relation to different
legal orders in all four countries. The conclusion is drawn that even though
their legal frameworks had become increasingly similar prior to the GFC,
these four central banks actually operated from a range of very different twotier relationships. A second comparison will demonstrate that when central
banks applied certain similar policy instruments, these did not guarantee
similar outcomes. It is evident that the GFC challenged these central banks
differently, and changed key distinctions between market-oriented and
government-controlled central banks.
In addition to putting central bank regulation under serious pressure, the
GFC also rewrote the prevailing government–market nexus. This will be
further illustrated by evidence from both West and East. However, despite
all the changes prompted by the GFC, the central bank’s core value as the
government’s banker and the bankers’ bank has remained untouched.
Therefore, this comparative study finds that the GFC has changed the twotier relationships governing central banks such as to create a better balance
between government and market.
Chapter 10 will conclude the comparative case studies of the four countries in question, by reference to the key research questions discussed here.