Differences on Fed, ECB and BOJ intervention in financial sector

Masaaki Shirakawa, Governor of the Bank of Japan in his recent speech explains the reasons for differences between the 3 central bank policies for financial sector support:

At the end of 2007,  the ratio of bank lending relative to nominal GDP, which can be used as a guide to capture the differences in the structure of financial intermediation, was 63 percent in the United States, 145 percent in the euro area, and 136 percent in Japan. On the other hand, the ratio of outstanding bonds issued by the private sector relative to nominal GDP was 168 percent in the United States, 81 percent in the euro area, and 94 percent in Japan. As these figures show, the role of financial intermediation in the United States is carried out mainly by the capital markets, whereas in the euro area it is bank lending. Japan comes in between the United States and the euro area, but the share of bank lending is relatively high.

Reflecting these differences in the structure of financial intermediation, the Federal Reserve has been conducting large-scale purchases of assets such as CP and real estate mortgage-backed securities (RMBS) directly in the markets to restore the functioning of capital markets. The Federal Reserve calls it a “credit easing policy.”

On the other hand, the European Central Bank (ECB) has introduced measures to restore the financial intermediation function of banks. Specifically, the ECB has expanded the range of eligible collateral that banks can submit in order to acquire funds from the central bank, and has been providing banks with unlimited amount of longer funds up to the value of eligible collateral at a fixed interest rate.

Meanwhile, the Bank of Japan has been taking actions to both restore the functioning of the markets and strengthen the financial intermediation function of banks. In the area of restoring the functioning of capital markets, the Bank has been conducting outright purchases of CP and corporate bonds through banks, although the scale of purchases is small relative to the United States where the degree of impairment of market functioning has been substantial.

In addition, in the area of strengthening the financial intermediation function of banks, the Bank, similar to the ECB, has been expanding the range of eligible collateral, and has also been providing long-term funds at low interest rates against corporate debt submitted as collateral. Through these measures, the Bank is aiming to facilitate smooth extension of bank credit.

Hmmm. This broadly sums up the reasons for differences in financial sector policies of the 3 central banks. Great insight…

2 Responses to “Differences on Fed, ECB and BOJ intervention in financial sector”

  1. Tirath Says:

    Indeed – although it is quite useful to know how deep the capital markets are in the US

  2. Thinking about Ministry of Finance/Treasury « Mostly Economics Says:

    […] plenty of literature on central banks, their set-up, their institutional structure etc etc ( see this, this , this, this, this etc for some […]

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