Before I hand over to the Chairman of the Per Jacobsson Foundation, I would just like to say that it is a great privilege to be here at Zurich University in this splendid auditorium. This room has been the venue for many renowned speakers in the past. There is a plaque here which explains that on the 19th of September, 1946, Sir Winston Churchill spoke in this room. In March, in Fulton, Missouri, he had given his famous IronCurtainspeech. Here, in September, he spoke on the theme “Let Europe Arise.” Much has happened since then, although
When the incoming Labour government in the United Kingdom transferred responsibility for the supervision of banks to the newly formed Financial Services Authority (FSA) in May 1997, at the same time it reaffirmed (for example, in the Chancellor’s Statement on the Bank of England of May 20, 1997, reprinted in the Bank of England Quarterly, 1997, p. 246) that the Bank of England retained responsibility for overall financial stability. But what exactly are the functional responsibilities of a central bank which is required to maintain systemic financial stability without having supervisory oversight of individual financial institutions? Particularly. since a number of other major countries have been following this same route—for example, in Scandinavia, Japan, Germany, Austria, and, now, China—it is worth starting with this question.
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.
JACQUES DE LAROSIÈRE: Charles, thank you very much, indeed, for this extremely thought-provoking speech. I think Professor Goodhart is happy to answer a few questions. I would ask you to be very concise in their formulation because we have very little time, but the floor is open now.