The Costs And Benefits Of Central Bank Rescue For Financial Crisis

Finance is the core of the modern economy. Stable and efficient financial system can provide strong support for economic development. But since recent 30 years, financial systems have been not stable at all in various countries.Financial crises outbreaks again and again, produces very disastrous cost for economic development.From 1982 Latin American debt crisis,American savings-and-loan debacle in 1980s, and Northern European bank crisis in 1990s,the financial crisis in Southeast Asia started from 1997, to the US subprime crisis started from 2007 and its influence has been alive until today, from Mexico,Brazil,Argentina in Latin America, formerly empire England in Europe, and Thailand,Korea created Asian miracle, to America ever called"owning the perfect modern financial regime",financial crises are contiguous.American subprime crisis broke out in 2007,changed to the global financial storm in 2008, brought most developed countries to economic recession in 2009.Violently changes of liquidity brought serious challenge to global economic and financial stability. Face to strong financial crisis,governments around the world can not sit still waiting for death,extensive crisis rescue measures carried out one after another. Central bank as one of the most important part for financial crisis rescue, put overall rescue measures on three levels into effect, including macro-economy,problematic financial institutions,and financial market lack of liquidity. No matter what rescue measures, central bank must undertake necessary cost to avoid systematic panic,must expend resource.What is the central bank's optimal principle for financial crisis rescue? In order to reduce the arbitrary of financial crisis rescue, when decide whether to rescue or not, central bank should estimate which is bigger between the resource cost expended in crisis rescue and the benefit of realizing the rescue target, should estimate which is weightier beteen the moral risk in process of rescue and the contagion effect if not rescue. Therefore, before intervention action, it is necessary to make cost and benefit analysis. Not only take the direct costs and direct benefits into account, but also the indirect costs and indirect benefits. Central bank must make overall plans and take all factors into consideration, and follow these priciples to decide whether to rescue and how, including maintaining financial system stability, rescue policy timely withdrawing, bewaring of moral risk, discretionary approach based on macro economic financial condition, attempting to acquire international cooperation and so on.This paper from generalized central bank's angle of view, studies on the optimal financial cirsis rescue principle by means of cost and benefit analysis, and makes a proposal on our country's central bank rescue for financial crisis.Firstly, this paper clears up the theory basis of central bank rescue for financial crisis. Writer defines the concept of "financial crisis rescue", in contrast of "financial crisis management", discusses the necessity of financial cirsis rescue and who should undertake this important task, thus builds the general framework of financial crisis rescue. After that writer analyzes the central bank's financial stability function, the development of Lender of the Last Resort(LLR), and the existing literatures about the cost and benefit analysis on financial crisis rescue.Secondly,this paper analyzes the international history experiences, such as the institutional arrangement of the UK, US and Japan's central bank rescue for the financial crisis. This paper provides the typical cases study, including either rescue or not and the successful and failed ones, as the empirical basis of the optimal central bank rescue principles.Thirdly, according to the international history experiences of central bank rescue for financial crisis, especially the initiative measures used by American Federal Reserve(FED) to rescue for the subprime crisis, writer concludes the optional measures of central bank rescue for financial crisis, such as the monetary policy in financial crisis, the rescue for problematic financial institution and financial market lack of liquidity.Forthly,writer analyzes central bank balance sheet to discuss the financial costs and currency instability of rescue for financial crisis, which are the direct costs of the central bank rescue for fianancial crisis. Central bank balance sheet is the accounting record of central bank operations which is an important means to adjust the commercial bank's balance and social monetary aggregates. Consequently, this paper researches the direct costs bases on the central bank's balance sheet.The Fifth, we use the principal-agent theory and game theory to analyze the problem of moral risk caused by central bank rescue for financial crisis. Moral risk plays a grand negative role in the total financial system, as a result, some economists regard the moral risk as the biggest costs in the rescue for financial crisis. This paper also studys on the multiple principal-agent relations, impacts of moral risk on the rescue for financial crisis.In order to reduce the moral risk, we take advantage of the game theory to discuss the optimal promise level of central bank.The Sixth, the paper discusses the benefits of the central bank rescue, including the direct benefits and indirect benefits.These benefits include not only the central bank's profits but also improvements on the economic situation, such as the rescue activity can maintain the economic growth and decrease the financial system risks.The seventh, according to the cost and revenue functions, writer studys the function of national utility, both in the closed economic conditions and open economic conditions. This paper draws the conclusions:the optimal principle of central bank rescue for financial crisis, including maintaining financial system stability, rescue policy timely withdrawing, bewaring of moral risk, discretionary approach based on macro economic financial condition, searching for international cooperation and so on.The last but not the least, based on the analysis of the special situation, writer points out the problems of China's central bank rescue for financial crisis, such as weak central bank independence, serious implicit guarantee, and lack of crisis warning mechanism. On the ground of our reality, this paper brings forward suggestions for making use of costs and benefits to analyze China's central bank rescue for financial crisis.The innovative points of this paper can be concluded as follows:1.This paper use cost and benefit analysis to measure the central bank rescue for financial crisis totally, which is seldom happened in the existing research on the financial crisis.Moreover,some literatures make government assistance(treasury assistance and financial assistance) as research field, anothers regard central bank as the Lender of Last Resort to deal with problematic financial institution. In the perspective of this article, the research field includes not only the lender of last resort, but also overall central bank rescue measures for financial crisis.2.Writer divides central bank rescue measures for financial crisis into three levels:monetary policy, problematic financial institution and financial market lack of liquidity.This paper induce that it is different among traditional monetary policy and the Lender of Last Resort and the way that central bank directly purchases the financial assets or uses the financial products lack of liquidity as mortgages to support financial institutions, which is financial rescue for the financial market lack of liquidity.3. This paper analyzes central bank's balance sheet to study the direct costs of financial crisis rescue. The existing literatures focus on central bank financial rescue measures by the change of central bank asset struction and scale, but pay no attention to the liabilities. In order to study the direct costs of financial crisis rescue, this article regards the central bank balance sheet as research object, views the change of central bank liabilities struction and scale as the key point of study, and discusses the financial costs of central bank and the problem of currency instability.4. Writer makes use of the national untitity function to study the costs and benefits of financial crisis rescue. The existing literatures analyze cost factors or benefit factors of financial crisis rescue respectively, it is not occurred that costs and benefits are integrated into one function to discuss.5. This paper researches the problem of the central bank rescue for financial crisis respectively in the closed and opened economic conditions. The existing literatures do not distinguish this two conditions.The disadvantages of this paper:One, lots of cost and benefit factors of central bank rescue for financial crisis can not be made the quantification analysis. As a result, the conclusions can not be explicit.The other, this paper pays no attention to the cooperation of treasury rescue and financial rescue. Meanwhile, the writer does not discuss the share and transfer of costs and benefits among the social departments.Next research proposals:the writer will do more systematic researches on the conductive process of various rescue measures, and endeavour to make the quantification tests.