Central Banking and Financial Stability in East Asia (Financial and Monetary Policy Studies Book 40)

"This book explores financial stability issues in the context of East Asia. In the East Asian region financial stability has been a major concern ever since the Asian crisis of 1997/98, which still looms large in the collective memory of the affected countries. The global crisis, which had its starting point in 2007, only served to exacerbate this concern. Safeguarding financial stability is therefore a major goal of any country in the region. Diverging cultural, political and economic backgrounds may however pose different stability challenges and necessary cooperation may be complicated by this diversity. Against this backdrop the contributions of this book by leading academics from the fields of economics and law as well as by practitioners from central banks shed light on various financial stability issues. The volume explores the legal environment of central banks as lenders of last resort and analyzes challenges to financial stability such as shadow banking and the choice of exchange rate regimes. Case studies from China, Japan and Indonesia are contrasted with experiences from Europe." -- Back cover Preface 6 List of Abbreviations 8 Contents 12 List of Contributors 14 Introduction: Financial Stability in East Asia-A Tentative Assessment 18 References 26 History and Legal Framework of the People ́s Bank of China 27 1 The History of the People ́s Bank of China 28 2 The Legal Framework of the People ́s Bank of China 29 2.1 Legal Status 29 2.2 Objectives and Tasks 30 2.3 Organisation 33 2.4 The Capital and Instruments of the PBoC 35 2.5 Independence 36 2.6 Reporting Obligations and Supervision 38 3 Conclusions 38 References 39 The Independence of the Bank of Japan in the Light of Statutory Rules and Central Bank Independence Indices 41 1 Introduction 41 2 The Genesis of Today ́s Bank of Japan 42 3 The Legal Independence of the Bank of Japan 44 3.1 The Establishment of Central Bank Independence in Principle 44 3.2 Institutional Independence 45 3.3 Personal Independence 46 3.4 Functional Independence 47 3.5 Financial Independence 47 3.6 Transparency and Accountability 48 4 Measuring the Independence of the Bank of Japan: Central Bank Indices 49 4.1 Measuring Central Bank Independence Through Indices 49 4.2 The Bank of Japan and Central Bank Independence Indices 50 4.2.1 The Bank of Japan Act of 1942 50 4.2.2 The New BoJ Act 51 4.2.3 Independence of the Bank of Japan in International Comparison 51 5 The Independence of the Bank of Japan in the Light of Recent Developments 54 References 55 The Legal Framework for the European System of Central Banks 58 1 The European Economic and Monetary Union 59 1.1 Formation of the European Economic and Monetary Union 59 1.2 The Transfer of Monetary Authority to the European Union 60 1.2.1 Monetary Policy as Exclusive Competence of the Union 60 1.2.2 The Obligation to Introduce the Euro 61 1.2.3 The Legal Formation of Two Groups of Member States 62 1.3 Safeguarding Price Stability 63 1.3.1 Price Stability as Objective of the EU 63 1.3.2 Price Stability as Primary Objective of Monetary Policy 64 1.3.3 The Content of the Term ``Price Stability ́ ́ 64 1.3.4 Safeguards to Guarantee the Objective ``Price Stability ́ ́ 66 1.4 General Economic Policy not a Task of the EU 66 1.4.1 Separation of Monetary Policy and Economic Policy 66 1.4.2 Competence for General Economic Policy with Member States 67 1.4.3 The Fiscal Responsibility of the Member States 68 1.5 The Rules on Government Deficits and Debt 74 1.5.1 Primary Law 74 1.5.2 Secondary Law 76 1.5.3 Euro Plus Pact 81 1.5.4 Law of Nations 81 2 The European System of Central Banks 83 2.1 The ESCB as the Core Content of the Monetary Union 83 2.2 The Institutional Set-Up of the ESCB 83 2.2.1 The ESCB 83 2.2.2 The Eurosystem 84 2.2.3 The ECB 84 2.2.4 The ECB and National Central Banks 84 2.2.5 The Finances of the ECB 85 2.3 The Comprehensive Guarantee of Independence 85 2.4 Limited Tasks 86 3 The Euro 87 3.1 Member States Whose Currency Is the Euro 87 3.2 Euro Banknotes and Coins 88 3.3 The Euro Outside the EU 88 4 Exit, Exclusion, or Parallel Currencies in the Eurozone? 89 4.1 Exit or Withdrawal 89 4.2 The Introduction of a Parallel Currency 92 4.3 Exclusion 93 4.3.1 General Rules 93 4.3.2 Renunciating the Acts of Admittance to the Euro 93 4.3.3 The Specific Circumstances in the Case of Greece 94 4.4 Permission to Introduce a New Currency 95 4.5 Consequences of an Illegal Exit from the Eurozone 96 References 97 Central Bank Independence in Times of High Fiscal Risk: The Case of Japan 102 1 Central Bank Independence: Relevance and Challenges 102 2 Central Bank Independence in Japan: The Real Test Is Still to Come 103 3 Government Debt and Monetary Expansion in a Deflationary Environment 105 3.1 Rich Country: Poor Government 105 3.2 Deficit Spending and Monetary Expansion 108 3.3 Japan ́s New Monetary Policy and Fiscal Stabilisation Under Abenomics 110 4 Outlook: What Will Happen Once the Inflation Target Has Been Achieved? 112 References 114 The Legality of Outright Monetary Transactions of the European System of Central Banks 116 1 Introduction 117 2 The Rulings of the German Federal Constitutional Court 118 2.1 The Course of Action 118 2.2 Demarcation of Court Competences 120 2.3 The Substance of the Referral Decision 122 2.4 The Reasoning of the Court 122 2.4.1 Preventative Legal Protection 122 2.4.2 Transgression of Competences 123 2.4.3 The Violation of the Prohibition of Monetary Financing 123 2.4.4 No Justification 124 2.4.5 Alternative Interpretation of OMT in Conformity with Union Law 124 3 Evaluation 125 3.1 The Integration-Friendly Attitude as a Starting-Point 126 3.2 The Admissibility of the Referral 128 3.2.1 The Reservation About Having the ``Last Word ́ ́ 128 3.2.2 The OMT Decision as Object of Judicial Review 129 3.2.3 Lacking Relevance 130 3.3 The Conformity of OMT with EU Law 131 3.3.1 OMT as Measure of Economic Policy 131 3.3.2 Monetary Financing of the Budget 133 3.4 Consequences of Diverging Court Rulings 133 4 Outlook 134 Appendix 1: Press Release on the OMT-Decision of the ECB 134 6 September 2012: Technical features of Outright Monetary Transactions 134 Conditionality 135 Coverage 135 Creditor Treatment 135 Sterilisation 136 Transparency 136 Securities Markets Programme 136 Appendix 2: Minutes of the 340th Meeting of the Governing Council of the European Central Bank on 5 and 6 September in Frankfu... 136 References 137 Externally Imposed Financial Repression, Conflicted Internationalisation of the Renminbi and External Balancing via Wage Adjus... 139 1 Introduction 139 2 China ́s Response to Buoyant Capital Inflows 140 2.1 Exchange Rate Stabilisation and Reserve Accumulation 141 2.2 Sterilisation, Externally-Imposed Financial Repression, and Shadow Banking 144 3 Limits to Renminbi Internationalisation 147 4 Re-balancing the Chinese Economy via Wage Adjustment 149 5 Outlook: International Repercussions 151 References 152 Demand and Supply of Shadow Banking in China 154 1 Introduction 154 2 Definition of Shadow Banking 155 3 Shadow Banking in China: An Overall Picture 156 3.1 Size, Growth and Main Components 156 3.2 International Comparison 159 3.3 Causes and Risks 159 4 Demand for Shadow Banking in China 161 5 Supply of Shadow Banking in China 164 6 Conclusion: Implications for Policy-Makers 165 References 168 Navigating the Trilemma: Central Banking in East Asia Between Inflation Targeting, Exchange-Rate Management and Guarding Finan... 170 1 Introduction 171 2 Inflation Targeting and Exchange-Rate Management in East Asia 173 3 IT and Financial Stability 175 4 Conclusion 178 References 179 Concern About Financial Stability Following the Recent US Legal Expansionism: International Law and East Asian Perspectives 181 1 Introduction 181 2 Concerns About Financial Stability in the Light of US Legal Expansionism 182 2.1 Foreign Resentment Caused by the Recent US Legal Expansionism 182 2.2 The Concern with Financial Stability Caused by the US Penalties 183 2.3 Alternative Currency in East Asia and the Role of International Law 184 3 International Law Concerns 185 3.1 Basic Legal Principles 185 3.2 Traditional Understanding of the Extra-Territorial Applications 186 3.3 Enlarging Territoriality: US Dollar Correspondent Bank Account Jurisdiction 187 3.4 Some US Scholars ́ Views 189 3.4.1 Extra-Territorial Application by Prof. Putnam 189 3.4.2 Supremacy of Treaties in the US and the Theory of Alex Glashausser 190 3.5 AML/CFT Combined with US Economic Sanctions 191 3.6 Not only Federal, but also State Governments 192 3.7 FATCA 193 3.8 The Role of International Law 193 4 International Law and East Asian Perspectives 194 References 195 Index 196 Front Matter....Pages i-xvi Introduction: Financial Stability in East Asia—A Tentative Assessment....Pages 1-9 History and Legal Framework of the People’s Bank of China....Pages 11-24 The Independence of the Bank of Japan in the Light of Statutory Rules and Central Bank Independence Indices....Pages 25-41 The Legal Framework for the European System of Central Banks....Pages 43-86 Central Bank Independence in Times of High Fiscal Risk: The Case of Japan....Pages 87-100 The Legality of Outright Monetary Transactions of the European System of Central Banks....Pages 101-123 Externally Imposed Financial Repression, Conflicted Internationalisation of the Renminbi and External Balancing via Wage Adjustment....Pages 125-139 Demand and Supply of Shadow Banking in China....Pages 141-156 Navigating the Trilemma: Central Banking in East Asia Between Inflation Targeting, Exchange-Rate Management and Guarding Financial Stability....Pages 157-167 Concern About Financial Stability Following the Recent US Legal Expansionism: International Law and East Asian Perspectives....Pages 169-183 Back Matter....Pages 185-187