A Comparative Study of Central Bank Regulation and Financial Stability: Lessons for the People’s Republic of China

Abstract

The global financial crisis (GFC) has been defined as the worst crisis since the 1930s Great Depression, affecting the worldwide financial and economic landscape and requiring profound legal reforms. The GFC has challenged the capacity of central banks to deal with financial risk. This thesis thus aims to explore the relationship between central bank regulation and financial stability. China has attracted particular attention by its quick responses and apparent speedy recovery; as a consequence, the strengths and weaknesses of its central bank should be critically assessed.
The research question of this thesis looks at how the GFC has challenged the role played by state central banks in maintaining financial stability. It is answered through a comparative study. In principle, rules and laws affect a central bank in the context of their two-tier relationships—with Government and with the Market. This relationship is also affected by central banks in response to financial crises. Four major central banks are selected for comparison in this thesis; these are the Federal Reserve System of the US (US Fed), the Bank of England (BOE), the Bank of Japan (BOJ) and the People’s Bank of China (PBC). Their respective legal frameworks have been shaped by whether they are market-oriented or government-controlled. But such a stark distinction has been challenged in view of the different styles of central bank crisis management that occurred during the GFC.
The case studies presented here suggest that a convergence has co-existed with some divergence during the development of central banks. The legal frameworks of these four central banks were very similar before the GFC, but they actually operated with varying levels of independence. With similar policy responses during the GFC, they have performed very differently and faced different tasks. This thesis seeks to identify some central explanatory variable for this behaviour, addressing the mismatch of similar risk management solutions and different outcomes. This comparative study argues that in spite of integration and globalization, the focus of central banks on risk management and financial stability has actually shown significant differences in approach.
This thesis has also undertaken a systematic study of China’s central bank. Overall, limited independence has seriously constrained the PBC’s functions, making other reform measures relatively superficial as solutions to various risk management problems. The GFC has further exposed its inherent shortcoming. After comparing the PBC with other three central banks, this thesis concludes that domestic vulnerabilities, rather than external shocks, continue to affect the PBC’s orientation; this requires an improved balance between political power and market principles.