The Adjustment Of Central Bank's Function Agaist The Background Of Interest Rate Liberalization

Interest rate liberalization means capital price is market-determined. The Third Plenary Session of the 18th Central Committee of CPC has stated to further deregulate interest rates and let the market play a decisive role in financial resources allocation. But the inevitable risks associated with interest rate liberalization would broadly affect financial institutions, investors, depositors and other financial consumers at macro and micro level. In order to make steady progress in interest rate liberalization and maintain financial stability at the same time, the reform of legal system is the only option. Based on the study of the content and related concepts of interest rate liberalization, this paper argues that financial risk management should be the primary function of the central bank under the background of interest rate liberalization, and changes should be made in financial (banking) regulation and monetary policy.In the first chapter, the logical starting point of the central bank function transition, namely, interest rate liberalization and its risks is introduced. It gives an answer to the question:why should the central bank transform its function under the background of interest rate liberalization. By analyzing the financial and legal meaning of interest rate liberalization, it is pointed out that interest rate reflects the capital price by its risks and period. Interest rate liberalization is an institutional transition process along with risks. Superficially, it is the deregulation of interest rate formation mechanism, but deeply it reflects the evolution logic between liberalism and government interventionism in the development of modern market economy. Interest rate liberalization means the balance between government control and market self-regulation, not the complete denial of financial supervision by the government. The endogenous risks and the exogenous of interest rate liberalization could appear at the macro-level respectively, but be more likely to interplay and evolve to systemic risks at micro-level. Lawful and rational intervention is the boundary line for government behavior. Interest rate liberalization changes the capital allocation right, and the reconstruction of capital allocation rights requires the central bank optimizing its macro-control measures. Interest rate liberalization could provide the monetary authority more policy tools, while the complexity of the financial market restrains the efficiency of central bank micro-control. During the process of interest rate liberalization, market must play its due role, and reinforcing financial regulation means the central bank should change its regulatory pattern from direct control to indirect management.The second chapter analyses the separation and combination of monetary policy and financial regulation function of the central bank, and discusses its pros and cons. That is to answer the question:what is the direction of Chinese central bank function reform? From the establishment and development history of foreign central banks, monetary policy and financial regulation are two core functions of modern central banks. In late 1980s, banking supervision function was separated from the central bank in some developed countries. But since 2007, the crisis caused several largest American financial institutions filing for bankruptcy, the United States and many other countries have introduced financial regulation system reform, giving the financial regulation power back to the central bank. The Law of the People's Bank of China issued in 1995 has a certain chapter specifying the micro prudential regulation power of the People's Bank of China. But in 2003's amendment, the main function of the People's Bank of China is financial macro-control, only keeping necessary regulation power for the purpose of implementing monetary policy and maintaining financial stability. Without financial regulatory power, the market data collection efficiency is reduced, and the independency and authority of the People's Bank of China is weakened which may affect the systemic risk management. After subprime crisis, most developed countries have passed legislation and allocated the financial regulation rights to central bank, in order to achieving the coordination between financial regulation and monetary policy and maintaining financial stability. Reallocating the financial regulation rights to central bank doesn't mean the micro-prudential regulation function simply returning to the central bank, but the establishment of macro-prudential management.The third chapter analyses the macro prudential regulation function of central bank, which explains how to realize the goal of the systemic risk management function, from the respect of financial regulation. The defining of macro prudential regulator, regulation measures and tools is the ex ante intervention of systemic risk management, while the lender of last resort is afterwards relief measure. Interest rate liberalization changes the formation mechanism of interest rate, which means the pricing power for monetary resources is transferred from the government to market. The role of the government has to be changed from the athlete to referee. And under current separated supervision system, the macro prudential policy of the PBOC should be in accordance with the micro prudential policies of other regulators. In the mean time, the PBOC should avoid the conflict between the macro prudential policy and monetary policy. In designing the legal system of the lender of last resort, the moral hazard should be minimized as possible and the influence scope and extent of the moral hazard should be controlled, which means the benefit of prevention systematic risk is greater than the negative externality of moral hazard caused by government bailout.In the last chapter, the suggestion for improving the monetary policy function of the central bank is proposed, which explains how to realize the goal of the systemic risk management function, from the respect of monetary policy. Compared with developed countries, the core problem of monetary policy decision-making mechanism in China is the independence of the central bank is weak in decision-making power allocation, which is reflected in monetary policy committee (MPC) mechanism. By comparing MPC's position, function, members, meeting procedure and information disclosure with other countries, it is suggested that it is necessary to improve MPC's legal status in China, to entitle monetary policy decision-making right to MPC, to improve the expertise of MPC and increase the transparency of monetary policy. Interest rate liberalization makes the operating tools of monetary policy changing from quantity adjustment to price adjustment. The interest rate manipulation case of Barclays revealed the weakness of interest rate mechanism and regulation system, so it is necessary to stipulate the benchmark interest rate and its formation mechanism through legislation.