It Is Far Better for Central Banks Not to Be Too Independent. Instead, Central Banks Should Work Very Closely with the Federal Governments
Central bank today is the most important feature of the financial systems of the majority of countries. The main function of a modern central bank is the monitoring and regulation of interest rates in the economy. The central bank does this by changing the interest rates that it charges on money that it lends to the banking system through its "discount windows". Interest rates are supposed to influence the level of economic activity in the economy.(Vaknin,2009) However, during a financial crisis, central banks often take on additional roles. Most importantly, in a credit crisis, the central bank often becomes the lender of last resort to guard against systemic risk in the banking sector and to support interbank lending. Interbank lending consists of banks loaning money to each other, typically for a short-term period, to meet reserve requirements. The rate at which these loans are made is called the interbank rate. During the global financial crisis, banks were wary of lending to one another, resulting in a rise in the interbank lending rate and the “freezing up” of credit. The credit freeze forced banks to seek liquidity from the central bank the lender of last resort. In fact, some suggest that lack of confidence in private money markets during the crisis resulted in central banks becoming, at least temporarily, the lender of only resort. This phenomenon resulted in central banks worldwide taking unprecedented actions to respond effectively to the crisis.( Dozark-Frideres,2010)
During the global financial crisis, three central banks played an important role in attempting to prevent and control the crisis. As the crisis became a global financial and economic crisis, other central banks also became involved, but the actions of the Federal Reserve, the European Central Bank, and the Bank of England remained the focus of attention. General background information about each central bank will be helpful in understanding the banks’ respective responses to the crisis.(
During the global financial crisis, three central banks played an important role in attempting to prevent and control the crisis. As the crisis became a global financial and economic crisis, other central banks also became involved, but the actions of the Federal Reserve, the European Central Bank, and the Bank of England remained the focus of attention. General background information about each central bank will be helpful in understanding the banks’ respective responses to the crisis.(