Policy responses to the Great Financial Crisis
The Great Financial Crisis has triggered an ongoing assessment of what went wrong, and
what can be done going forward to prevent a similar nancial crisis. This assessment has
driven a broad policy response in the realms of monetary and scal policy and nancial
regulation and supervision. To date, the policy response reects a common recognition that
the numerous and far-reaching benets of nancial integration are not without risks, in
particular, the risk of contagion and the possibility of a landscape of future domestic,
regional and global systemic crisis. To a very large degree, policymakers have also
developed these answers in common, in response to the mandate given to them by G-20
leaders at the summits in Washington in 2008 and Pittsburgh in 2009.
This special issue of the Journal of Financial Regulation and Compliance, “Policy
Responses to the Great Financial Crisis”, published in two parts (part 2 will be in issue 4)
has selected a number of new articles that evaluate both the assessments made and
actions taken by policymakers. In this introductory article, we briey discuss the central
banks’ response to the crisis and the new prudential regulatory regime that has emerged
since the crisis.
2. The central banks’ response to the nancial crisis
Central banks have played a key role in limiting the impact of the Great Financial Crisis on
the real economy. Through timely interventions at the height of the crisis and through policy
innovations, central banks together with scal authorities helped contain the crisis and set
the stage for recovery. As a result, economists now speak of the Great Recession, rather than
the Greater Depression.
Contagion effects from the collapse of Lehman Brothers on 14 September 2008
galvanised central banks and scal authorities into action on several fronts.
Extraordinary times demand extraordinary measures in terms of both speed and scope.
Central banks responded on both counts. First, they ensured together with scal
authorities that contagion effects from the collapse of Lehman Brothers would not cause
other systemic institutions to topple over. To prevent such a domino effect, the Federal
Reserve (Fed) provided a lender of last resort facility to American International Group
(AIG) and licensed Goldman Sachs and Morgan Stanley as bank holding companies so
that these investment banks could have access to central bank liquidity facilities. In
October 2008, the USA used the hastily enacted Troubled Asset Relief Program (TARP)
to reinforce the capital of the largest US banks. Other countries took similar measures. In
the UK, Germany, Switzerland, France, The Netherlands, Belgium, Austria and Ireland
(to give a partial list), the state provided solvency and/or liquidity support to major
banks. Heads of government and their nance ministers met to ensure international
cooperation during the crisis, and to avert the “beggar thy neighbor” policies that had
helped turn the US stock market crash of 1929 into the Great Depression.
Second, central banks ooded the market with liquidity. Led by the Fed, central banks
poured trillions of dollars into their economies. With dollar liquidity in short supply in many
The views expressed here are those of the author and do not necessarily represent those of Bank of
Spain or the euro system.
Journalof Financial Regulation
Vol.25 No. 3, 2017
©Emerald Publishing Limited