Central bank mandates have evolved with time beyond price stability and economic growth objectives to include financial stability, financial inclusion, and, more recently, climate change in some jurisdictions. This chapter analyses the potential role of central banks in dealing with increasingly significant climate risk. Existing literature suggests that physical and transition risks from climate change are key risks to macroeconomic and financial stability. The chapter argues that central banks should, therefore, at a minimum, incorporate climate risk in their macroeconomic and financial stability risk assessments to determine appropriate policy and regulatory tools for addressing them within the boundaries of existing mandates and underpinned by a transparent framework of decision-making and accountability. Central banks should avoid mission creep by remaining focused on achieving clear statutory objectives, while at the same time avoiding possible legal and credibility risks from doing nothing or too little, too late. The chapter further argues that central banks in emerging and developing economies face peculiar challenges in assessing the dynamics of climate risk, estimating potential impacts, and calibrating tools to address potential impacts on price or financial stability. It concludes by recognising progress at the international level and calls for additional guidance, particularly for central banks in emerging and developing economies, to help design proportional and effective central bank policy and regulatory measures to help contain significant climate risks they face.

Climate risks pose significant financial challenges that align with the stability mandates of central banks and supervisors. They can lead to economic losses impacting households, firms, and financial institutions, potentially threatening financial stability. Current supervisory efforts have focused on microprudential policies, with the Basel Committee on Banking Supervision (BCBS) establishing a comprehensive approach across the Basel Framework’s three pillars. However, the systemic nature of climate risks necessitates macroprudential responses as well. Like other systemic risks, climate risks are widespread in financial markets and can lead to amplified financial disruptions. However, unlike other systemic risks, climate risks are foreseeable and irreversible, although they are subject to uncertainty in timing and outcomes. This chapter argues that effective macroprudential measures, such as systemic capital buffers and concentration limits, can enhance resilience and mitigate future risks but require careful calibration to avoid adverse effects. Against this background, and given that immediate action is essential to prevent delayed responses that could exacerbate financial instability, central banks and supervisors could prioritize large institutions and high-risk sectors in initial implementations.

Financial stability is essential for sustainable economic growth, and prudential policies have been reinforced since the Global Financial Crisis (GFC) to safeguard this stability. The Basel III framework introduced stringent capital, liquidity, and risk management requirements for banks, strengthening their resilience. In the face of growing climate-related risks, central banks and supervisory authorities must ensure that financial systems remain stable. Extreme weather events and abrupt transitions to a low-carbon economy can lead to significant financial losses, including asset stranding and increased defaults, threatening overall financial stability. Central banks and supervisory authorities must integrate climate risks into their financial supervision frameworks, adapting existing tools to manage these complex, systemic risks. Prudential responses must encompass both individual institutions and broader financial systems to mitigate the impact of climate change on financial stability. Ensuring a resilient financial system is crucial for maintaining economic stability in the transition to a low-carbon future.

This chapter examines the challenges and risks within China’s real estate sector, a cornerstone of its hybrid economy that blends state intervention with market dynamics. The analysis highlights how local governments’ heavy reliance on land sales and debt financing has spurred over-investment and elevated leverage, creating systemic risks for both the financial system and broader economic growth. It discusses the roles of various channels – financing, tournament, and central government guarantees – in exacerbating market distortions and encouraging speculative behavior. The chapter also reviews recent market trends during the COVID-19 period, revealing significant mismatches between demand, supply, and pricing across different city tiers. While government interventions have successfully postponed a hard landing, they may not address underlying structural issues. Ultimately, the chapter argues that sustainable risk mitigation in the real estate sector requires structural reforms and the development of new economic growth engines to reduce over-dependence on real estate.

This case highlights how systemic/endemic racism creates many barriers to equity and financial stability for Black individuals, particularly Black single mothers. Given the endemic nature of racism and the systemic ways it can affect clients and systems, social workers should make intentional efforts to be aware of the many ways race-based oppression can affect clients, communities, and society as a whole. It is, therefore, essential that social workers educate themselves on systemic ways in which racism affects their practice with Black clients and to work towards dismantling institutions and practices that contribute to the systemic nature of financial instability among the Black community and Black single mothers specifically.

The purpose of our book is to chronicle and analyze Morgan’s interventions in financial crises, telling the story of how he learned the art of last resort lending by trial and error, and finding its relevance to issues that last resort lenders still face in the early twenty-first century. We classify Morgan’s last resort loans into three types.

One of the key challenges of regulating internet platforms is international cooperation. This chapter offers some insights into platform responsibility reforms by relying on forty years of experience in regulating cross-border financial institutions. Internet platforms and cross-border banks have much in common from a regulatory perspective. They both operate in an interconnected global market that lacks a supranational regulatory framework. And they also tend to generate cross-border spillovers that are difficult to control. Harmful content and systemic risks – the two key regulatory challenges for platforms and banks, respectively – can be conceptualized as negative externalities.

One of the main lessons learned in regulating cross-border banks is that, under certain conditions, international regulatory cooperation is possible. We have witnessed that in the successful design and implementation of the Basel Accord – the global banking standard that regulates banks’ solvency and liquidity risks. In this chapter, I will analyze the conditions under which cooperation can ensue and what the history of the Basel Accord can teach to platform responsibility reforms. In the last part, I will discuss what can be done when cooperation is more challenging.

This chapter sets out a dozen propositions aimed at underpinning and, perhaps, revitalising Britain’s Monetary Policy Committee and the regime entrusted to it. It has not addressed the many reform proposals - such as merging the MPC and Financial Policy Committee, or having regional representatives on the MPC. Nor has it addressed the incentives of the regime’s parliamentary and other overseers.

This chapter asks how a new generation of central banks in the interwar period changed their function, away from state financing and financial stability provision, and toward stabilizing prices and avoiding fiscal and financial dominance. The new concept of a central bank as an institutional constraint, imposed from the outside, and movement from a “can do” to a “can’t do” institution, ultimately ended in failure. It made for bad policy and poor outcomes, specifically contributing failure to stem contagion in the 1931 financial crisis. After 1945 a new reinvention of central banking involved the elaboration of a social consensus that bought back ele-ments of the “can do” environment.

Macroprudential policy involves regulation and supervision of financial institutions to safeguard stability in the financial system as a whole. The system can become vulnerable to loss contagion even when institutions on an individual basis maintain strong balance sheets. Examples of macroprudential policy instruments include capital and liquidity requirements; limits on credit and leverage; regulation pertaining to borrowers, for example loan-to-value ratios; and special requirements for systemically important financial institutions. Systemic risk tends to build in boom times and subside in busts. These fluctuations tend to be amplified in the Emerging East Asia setting by global capital flows. Macroprudential policy aims at moderating the fluctuations. Analysis is complicated by the diversity of instruments available and the complexity of the regulation involved. Korea’s relatively long history of experience offers opportunity for study.

This chapter investigates the practice of bankers’ remuneration in the UK after the GFC and analyses the effectiveness of the regulatory initiatives. To track the changes, the investigation is also based on the UK ‘Big Four’ banks. It is found that the focus of performance-based remuneration has shifted from short-term incentives to long-term incentives. Complying with deferral, clawback and malus, the period of performance assessment has been significantly extended. Banks have also adopted risk-adjusted and stability-oriented indicators to link bankers’ remuneration to the sustainability and risk management of banks. However, to circumvent bankers’ bonus cap, banks have introduced role-based pay – a new form of fixed remuneration. Role-based pay is counterproductive, as it may reduce pay-performance sensitivity while encouraging bankers to take excessive risks. This chapter also argues that bankers’ bonus cap is conflicted with other initiatives, the implementation of which relies on performance-based remuneration constituting a significant portion of the total remuneration.

The chapter analyses how the ECB was granted responsibility over prudential supervision as part of the EU banking union. This changed the EU perspective on financial services from internal market issue to a macroeconomic financial stability issue. The ECB now supervises directly the largest banking groups in the euro area and monitors the supervision of all other banks as well. The ECB’s role in the banking union raises new types of constitutional questions and requires a different analytical framework. A formal legal assessment, particularly on the legal basis for conferring specific tasks on the ECB under Article 127(6) TFEU, is complemented with a broader economic constitutional analysis. Here, the context in which the banking union was initiated is particularly important. The chapter also discusses the merits and caveats of combining banking supervision and monetary policy, where the conflict of interest is the main caveat particularly for an independent institution such as the ECB. It is also concluded that the supervision could return to the internal market setting and again be separated from monetary policy in the future.

The last chapter is devoted to the fundamental transformation of the European Macroeconomic Constitution and particularly its objectives during the last decade that has also changed the ECB from a central bank of stability to a central bank of crisis. The great promise of the EMU that the properly designed and constitutionally protected macroeconomic framework would guarantee economic stability and prosperity has failed. In particular, the sole focus on price stability objective and constraints for national economic policy failed to ensure economic, fiscal, or even financial stability. The ECB 2021 strategy review tried to reflect these changes. The chapter analyses, how the ECB could seek to readjust its role in the euro area economy by incorporating new objectives. The discussion starts by analysing how and why the role of price stability has changed, which is followed by assessments of how the broader stability objective have gained more practical and eventually also formal importance. Furthermore, the objectives of structural economic adjustment and increasingly environmental sustainability are discussed as the new candidates for the objectives of the European Macroeconomic Constitution and the ECB. As an Epilogue, the book concludes with a broader forward-looking perspective on the options available.

This chapter analyses the regulatory framework of bankers’ remuneration in the UK in response to the problems in the pre-GFC practice. It first summarises the ideological change among regulators and academics with respect to the regulation of bankers’ remuneration and concludes that maintaining financial stability and protecting the public interest are the primary objectives. The chapter then discusses the initiatives implemented by the UK banking regulators, including deferral, clawback, malus and risk-adjusted performance metrics, which are aimed at guiding banks to reform their incentive mechanisms by extending the assessment period of performance assessment and applying risk-adjusted and stability-oriented indicators. It also discusses the EU bankers’ bonus cap and the opposite stance of the UK regulators to its implementation.

During the 2008–9 global financial crisis, credit default swaps created conduits in the financial system which facilitated the transmission of systemic risk. In response, the Financial Stability Board recommended over-the-counter derivative clearing through a central clearing counterparty. Although the Securities and Futures Commission is the designated supervisor and resolution authority for Hong Kong’s central clearing counterparty, OTC Clear, its supervisory ambit, capacity, and powers are insufficient to mitigate systemic risk and manage financial stability. This chapter argues that a securities supervisor is not the optimal supervisor or resolution authority for OTC Clear. Central clearing counterparties require credit and liquidity risk management which aligns more with banking supervision and central banking. This is supported by the dominance of foreign exchange and interest rate derivatives being traded in Hong Kong. The optimal resolution authority for OTC Clear is the Hong Kong Monetary Authority, being the resolution authority for systemically important banks, having monetary authority expertise that aligns with foreign exchange and interest rate risks, experience in mitigating credit and liquidity risks, and being designed to manage financial stability.

Supervisory models evolve with financial markets. To address the evolution of financial markets and institutions, new supervisory structures have been developed. This chapter analyzes systemic supervision under the integrated, functional, and Twin Peaks models, and systemic composite bodies to elucidate their strengths and weaknesses when managing financial stability. Models examined cover those in Hong Kong, Mainland China, the United States, United Kingdom, Singapore, Australia, South Africa, and the Netherlands. Systemic oversight between traditional central banks and integrated micro-prudential supervisors is subject to supervisory underlap. This was the core weakness of the United Kingdom’s integrated model and is a regulatory flaw inherent to the institutional, sectoral, and functional models. Composite systemic bodies are imperative for supervisory models consisting of central banks that are not unified with prudential supervisors or divided among multiple supervisors. The Twin Peaks model does not need a composite systemic body because this is the role of the systemic peak supervisor. Neither does a unified fully integrated supervisor because the role is internalized. However, competing objectives within a fully integrated supervisor can produce bias and conflicts, eroding systemic supervision and financial stability.

In the wake of the 2008–9 global financial crisis, the G20 devised a framework for a sustainable recovery based on international cooperation. An agreement was reached to ensure that inter alia macro-prudential and regulatory policies would support sustainable economies by preventing credit and asset price cycles from becoming forces for financial destabilization. The G20 recognized the importance of striking a balance between micro- and macro-prudential regulation to control risks, and to develop tools to monitor the build-up of systemic risk in the financial system. This chapter argues that the design of the supervisory structure is instrumental in striking the appropriate balance between these regulatory disciplines. Clear mandates and supervisory judgement are necessary to control this interdependent relationship. Regulatory underlap, gaps, and arbitrage can surface when the supervisory structure does not harmonize with legal infrastructure. To mitigate these regulatory flaws causing financial instability and producing unsustainable economies, supervisors must have sufficient capacity, expertise, awareness, and discretion. Attaining financial stability and a sustainable economy requires the supervisory structure or model, and the supervisor’s capacity and expertise to be harmonized with the legal infrastructure.

Banks can become illiquid when wholesale funding markets to not function for extended periods of time. Illiquidity quickly transforms into insolvency if liquid assets or cash flows cannot cover banks’ maturing liabilities. Since the 2008–9 global financial crisis, a new financial stability consensus has emerged whereby central banks began implementing unconventional liquidity tools. This chapter comparatively analyzes Hong Kong’s sectoral supervision with the integrated, functional, and Twin Peaks models when implementing unconventional liquidity tools. The macro- and micro-prudential characteristics of unconventional liquidity tools necessitate systemic supervision by central banks and banking supervisors. Effective systemic supervision of unconventional liquidity tools cannot be presumed merely by the presence of a systemic supervisory agency. Underlap can weaken systemic risk objectives and mandates when implementing unconventional liquidity tools because supervisory roles can become uncertain. In this context, Hong Kong’s composite systemic supervisor, the Financial Stability Committee, may not be able to properly coordinate member financial supervisors. Uncertainty can lead to tensions between Financial Stability Committee members, impeding systemic supervisory effectiveness. Tensions coupled with uncertainty can produce macro-prudential and systemic supervisory flaws when managing funding and market liquidity, heightening banking system instability.