Abstract

This paper presents the functional responsibilities of a central bank which is required to maintain systemic financial stability without having supervisory oversight of individual financial institutions. Although the Financial Services Authority (FSA) has responsibility for supervising individual financial institutions, the central bank retains responsibility for the smooth running of the domestic payments system and, by extension, oversight of the structure and soundness of the clearing and settlement systems of the main financial markets, money and bond markets, the foreign exchange market, and the equity market. A second, associated function, thrown into prominence by 9/11, is to undertake contingency planning against a major physical disruption of markets, whether by terrorism or natural causes. A third role, perhaps the best-known component in this portfolio of operational tasks, is to provide injections of liquidity, either to the financial system as a whole via open market operations or via lender-of-last-resort (LOLR) actions to individual institutions. A problem with such latter LOLR operations is that they might put taxpayers’ money at risk.

C.A.E. Goodhart, CBE

C.A.E. Goodhart, CBE, is Deputy Director of the Financial Markets Group at the London School of Economics (LSE). He served as Norman Sosnow Professor of Banking and Finance at the LSE from 1985 to 2002. Previously, Dr. Goodhart worked at the Bank of England for 17 years as a monetary adviser, becoming Chief Adviser in 1980. In 1997, he was appointed as an outside independent member of the newly formed Bank of England Monetary Policy Committee until May 2000. He was elected Fellow of the British Academy in 1990 and awarded the Commander of the Order of the British Empire (CBE) in the New Year’s Honours List for 1997 for services to monetary economics.

Dr. Goodhart has taught at the University of Cambridge, where he was a Fellow of Trinity College, and at the LSE. He has published extensively over the years in the areas of monetary history, contemporary monetary issues, and financial regulation. These publications include, besides numerous articles, a monetary textbook, Money, Information, and Uncertainty (second edition, 1989); two collections of papers on monetary policy, Monetary Theory and Practice: The UK Experience (1984) and The Central Bank and the Financial System (1995); and a monograph on the foreign exchange market, The Foreign Exchange Market: Empirical Studies with High-Frequency Data (2000).

Dr. Goodhart earned his bachelor’s degree from the University of Cambridge and a Ph.D. from Harvard University. In his spare time, he is a sheep farmer.

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