Changing Role of Central Banks and Different Policies Implemented in Response to the Recent Financial Crisis

With respect to competition policies, rescue cases involving guarantees (contrasted with restructuring cases) during the recent Financial Crisis, have illustrated the prominent position which the goal of promoting financial stability has assumed over that of the prevention or limitation of possible distortions of competition which may arise when granting State aid. In respect of monetary policies and tools implemented by central banks, the recent Financial Crisis has also illustrated how the traditional role of central banks has been extended to incorporate more innovative roles. The reduction of interest rates by central banks to all time lows – along with other unprecedented actions which have been undertaken by central banks, as evidenced by the recent Financial Crisis, have been regarded as extensions of traditional methods of operation which have resulted in a new territory in which tools have been implemented in very new ways.The importance attached to maintaining and promoting financial stability – as well as the need to facilitate rescue and restructuring measures aimed at preventing systemically relevant financial institutions from failure, demonstrate how far authorities are willing to overlook certain competition policies. However, increased government and central bank intervention also simultaneously trigger the usual concerns – which include moral hazard and the danger of serving as long term substitutes for market discipline. How far central banks and governments should intervene and how far distortions of competition should be permitted ultimately depends on how systemically relevant a financial institution is. An interesting observation derives from the relationship between State aid grants, competition, and the potential to induce higher risk taking levels. Whilst the need to promote and maintain financial stability is paramount, safeguards need to be implemented and enforced to ensure that measures geared towards the aim of sustaining system stability (measures such as lender of last resort arrangements and State rescues) do not unduly distort competition as well as induce higher risk taking levels. As well as providing an analysis of tools, competition and monetary policies implemented during the recent Financial Crisis, this paper also attempts to highlight how far central banks and governments should intervene during periods of financial crises. Through an analysis of how the traditional role of central banks has evolved through the duration of the Financial Crisis, it also provides an idea of how regulatory roles could immensely benefit from such an evolvement of central banks' roles.