During economic crisis, central banks can assume critical measures to restructure financial markets and restore public confidence. The recent financial challenges have affected the economies of numerous countries. Consequently, the concerned central banks have taken swift moves to help in the matter. This paper discusses how prominent central banks/financial institutions like European Central Bank (ECB), US Central Bank (The Fed), Greek Central Bank, Bank of England, and other central banks globally have responded to the matter. It is evident that most of their strategies have helped in the economic re-establishment and restoration of public confidence mentioned before. This is augmented by illustrations from current events in the financial markets. Agreeably, central banks have massive roles to execute during financial hitches (Ciro 9).
Major Measures Taken by Central Banks
In the recent globalized fiscal crisis, central banks have critically established decisive strategies to streamline financial markets. These are mandated to normalize the money markets and restore public assurance regarding the situation. For example, Greek Central Bank recently extended substantial financial backing to failing banks, intermediaries, and other financial institutions within the country to avoid further extortion of the economy and recapture the public confidence. It is important to agree that such financial mishaps require swift and well-orchestrated remedial responses to correct the situation. It is from this context that the entire argument lies. Evidently, by supporting the plunging financial institutions, it is apparent that lending (for loans) will continue as expected, money will be disseminated to the public with increased circulation, public spending will hike, and other fiscal provisions will restore to normal (Dozark-Frideres 1). This move has helped the Greeks money market from plunging further. Precisely, central banks have the mandate to support financial institutions as they strive to restore the alleged public confidence.
Another prominent move evident in this context is the manipulation of the capital reserve requirements. In banks, capital reserve is the available securities, which can be lent to other financial institutions for dissemination to the public. In this regard, the Bank of England (BoE) and The Fed have tried to regulate their capital reserves to ensure that the money that is in circulation is enough to normalize the situation. These central banks (among others) have the mandate to regulate the capital reserves and interest rates either to increase or decrease lending provisions depending on the then financial situation. Contextually, this has proved quite lucrative in various contexts since the loaning capabilities depend on the availability of assets to secure such loans. The move by the Bank of England to reduce the lending rates usually encourages the public to borrow extensively from the financial institutions. Thus, they gain the required confidence hence perceiving the situation as normal. Contextually, regulating the money markets to favor the demands of the public with respect to money circulation is another critical move in this framework.
Central banks have the mandates to impose laws that will helps in restoring the money market values. This is evident in the Greek’s Central Bank, The Fed, Bank of England, and other regulatory financial institutions. Additionally, the public is sensitive to the operational interest rates. If these interest rates are normal, the entire lending phenomenon normalizes. Most of the European central banks have regulated their operational lending interest rates depending on the financial situation thus affecting the financial markets considerably.
Evidently, a notable current event in the financial crisis is the reduced interbank lending where banks do not trust each other with money in the financial arenas. In such circumstances, central bank serves as the last resort for the borrowing opportunities, which must be observed with criticality. Additionally, it is crucial to consider various aspects of this phenomenon before it affects the public negatively (Dozark-Frideres 1). For example, European Central Bank (ECB) has endeavored to support interbank lending in the recent past by acting as a security. When banks fail to lend each other, there is an increase in the interbank lending rates, a move that discourages the liquidity and circulation of cash. Hence, ECB has recently managed to promote the interbank lending operations to ensure that the public can access such funds with ease. This reduces the tension and panic that engulf the public during the financial crisis. This is a move taken by numerous central banks including The Fed, US Central Bank, ECB, and other financial institutions, which reacted to the mentioned financial crisis. Precisely, central banks have the mandate to increase the interbank lending operations in order to restore the public confidence during the financial turmoil. The lending aspects ultimately affect the public and financial markets with positivity. This is promoted by enacting regulations that can favor the situation.
US central bank and The Fed, in response to the recent financial crisis, tried to regulate the monetary policies by controlling the credit and monetary conditions in the economy in search for utmost employment, steady prices, and modest long-term interest rates. Evidently, the public usually feel the pinch of financial crisis through these factors. When The Fed strives to normalize these aspects through its monetary provisions, it is notable the public will be at ease. When changing fiscal policies, the concerned Federal Reserve Chairman announces the desired changes in the FOMC gatherings. Fed buys and sells financial instruments through FOMC with the intention of influencing the operational interest rates and credit accessibility. This move affects the financial markets through the increase of viable operations and normalization of the exchange rates. Additionally people can easily buy securities with regard to money market exchanges.
Another approach given by the central banks is the introduction of Term Auction Facility (TAF), which is a novel methodology in providing liquidity to the plunging financial institutions. Since mishaps in such institutions can affect customers significantly, as noticed by the public panic, a move to restore their financial essence can help massively in the financial markets. Evidently, TAF was a well-orchestrated strategy among the central banks of US, EU, British, Canada, and Switzerland to uplift the besieged financial corporations with the necessary liquidity in order to normalize their operations for the public interests and the wellness of the financial markets (Dozark-Frideres 1). TAF is mandated to provide numerous borrowers with affordable loans hence increasing the circulation of money and regaining from the financial hitches.
Another move that The Fed did in response to the mentioned crisis is the enactment of “Primary Dealer Credit Facility (PDCF)”, which was meant support or steer the sale of collapsing public corporations to prevent the public from losing funds (Dozark-Frideres 1). For example, it steered the sale of Bear Stearns by JP Morgan Company by providing reasonable securities for this deal (Dozark-Frideres 1). This restored the public confidence in such massive corporations and in the entire financial turmoil. Consequently, there were considerable effects in the financial markets with regard to these exchanges. Precisely, a central bank can steer the sale of prominent corporations to prevent lose of public funds and the derailment of the financial markets.
Additionally, Bank of England and US central bank introduced the Quantitative Easing phenomenon to help in the restoration of the public trust with regard to economic plunge. Quantitative Easing is a process where the concerned central bank injects cash into the economy by striving to make money and eventually use that money in purchasing assets to secure the economy. Other central banks like ECB have strived to inject emergency funds into the economy besides the use of conventional monetary policies to curb the situation. This has helped in steadying the Eurozone’s credit and financial markets (Ciro 9). Other banks like Bank of England (BoE) introduced a Special Liquidity Scheme (SLS) to help in curbing the situation and stabilizing the financial markets.
Agreeably, people usually panic whenever there is an economic plunge. Nonetheless, it is the role of central banks to restore the required confidence in this context. Several central banks have taken varying measure to respond to the critical financial situations as noticed earlier. The use of conventional monetary regulations, liquidity support, interest rates reduction, promotion of interbank lending, regulation of capital reserves, creation of emergency budgets, ratification of responsive provisions like TAF, SLS, and PDCF as well as recapitalization of troubled banks are some of the lucrative measures applicable in this context.
Ciro, Tony. The Global Financial Crisis: Triggers, Responses and Aftermath. Surrey: Ashgate Pub, 2012. Print.
Dozark-Frideres, Taryn. Part 5-V: How Did the Central Banks in the U.S. and Europe React to the Global Financial Crisis?. 2010. Web.