We start it with a brief historical overview about the emergence of independent central banks in Chapter 1. The chapter looks at different historical periods to work out ways to secure price stability that have been chosen in the past.

Chapter 1 introduces the reader to macro-prudential policy and exposes the reader to the problem of persistently instable financial markets, which raise the question of if and how far the macro-prudential regulatory program post-crisis had any effect. In contrast to binary paradigm shift views, which see no to little change, I introduce a multidimensional view of regulatory change that can detect massive change in the economic ideas underlying financial regulation, while pointing to the administrative and political limitations that prevent these ideas from becoming fully performative. Pointing to these contradictions, the chapter introduces the analytical framework and the main contributions of the book, followed by an outline of the different chapters.

This chapter is an overview of central banking developments between 1919 and 1939, highlighting the establishment and operation of 28 new central banks, most in what are now called emerging markets and developing countries. Inspired by expert advice and underpinned by foreign lending, the new banks were designed to function independently from political interference, and to defend the gold standard as part an international, rules-based network of cooperating institutions. The Great Depression revealed the flaws in this setup. As capital flows dried up and international cooperation faltered, the gold standard disintegrated, and central banks were unable to head off macroeconomic and financial collapse. Designed to fight inflation, they were ill-prepared to address financial fragility. In the wake of their failure, a two-pronged reaction set in. Central bank autonomy was curtailed, while monetary policy was subordinated to new policy objectives, including the support of import substitution in Latin America and central planning in Eastern Europe. At the same time, central banks’ powers expanded, as they were transformed into agents of state-led development policy. Thus, the new central banks of the 1920s and 1930s were integrally involved not just in post-First World War reconstruction and the Great Depression, but also in the key economic developments of the mid-20th century.

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.

The interwar decades saw the emergence of central banking institutions in the prosperous white settler ‘dominions’ of Australia, South Africa, New Zealand, and Canada. Local political and business interests promoted central banks with a view to fostering domestic economic and financial stability, while the Bank of England and British government imagined a chain of central banks across the empire that would support their policies. Given that financial markets in the dominions were underdeveloped, it was difficult for the new central banks control monetary conditions, mirroring problems in Central and Eastern Europe. In addition, the British discovered that they could not impose their ideas on the dominions, especially when local economic concerns conflicted with those of the imperial centre.

Given that modern sovereign bonds usually contain the choice of forum clause designating domestic courts to enforce the contractual terms of such instruments, sovereign immunities are among the foremost options for debtor sovereigns to forestall bondholder litigation. This study has concluded that contractual arrangements and statutory provisions on the waiver of immunities represent a fair balance between bondholders’ access to judicial remedies and respect for sovereign debt restructuring. In general, the broad waiver of jurisdictional immunity maintains the option for a holdout, whereas immunity from measures of constraint may prevent eventual enforcement against the assets held by defaulting sovereigns. Such a consequence does not unduly undermine the interests of bondholders, insofar as holdout strategies are envisaged in practice to gain leverage in a debt restructuring negotiation rather than to enforce contractual rights through litigation. In addition, an option of a stay of proceedings available in some jurisdictions may provide a basis for the courts to indirectly regulate the progress of sovereign debt restructuring by imposing and lifting a stay of proceedings.

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.

Managing banking sector liquidity in financial crises has historically depended on deposit protection and the lender of last resort. Deposit protection assuages market panics by guaranteeing that depositors will be paid if a bank fails. The lender of last resort is a capital injection to preclude a failure when an illiquid yet solvent bank has exhausted all other funding sources. This chapter analyzes deposit protection, the lender of last resort, and how different supervisory structures influence the implementation of these bank stabilization tools. Moreover, certain structures can adversely affect supervisors from fulfilling their financial stability mandates. Hong Kong is susceptible to a supervisory coordination failure from a statutory friction that prioritizes monetary over banking stability. A tension is created within the Hong Kong Monetary Authority which could compel the Financial Secretary to usurp control during a financial crisis. This tension exposes the Hong Kong Monetary Authority to macro-prudential underlap which could undermine its financial stability mandate. Despite these flaws, the statutory mandates of the Hong Kong Monetary Authority complement Hong Kong’s deposit protection and lender-of-last-resort policies, which have performed faultlessly over the past 20 years. However, neither approach has been sufficiently tested during this period.

Choosing the optimum supervisory model to manage financial stability requires a consideration of country-specific preferences based on the level of market development and the configuration of the financial system. The choice of model, its structural design, and the regulatory mandates will influence a supervisor’s effectiveness for managing financial stability. This Chapter analyzes the sectoral models in Mainland China, the United States, and Hong Kong to showcase institutional design elements and variations across different financial systems. The chapter assesses the advantages and disadvantages of the unified central bank and banking supervisory design of the Hong Kong Monetary Authority. Understanding how monetary policies affect banking institutions can be critical for maintaining banking sector stability. A unified structure creates a supervisory synergy when calibrating the lender of last resort and unconventional liquidity tools because coordination tensions are eliminated. The Hong Kong Monetary Authority is compromised because of the Linked Exchange Rate System and the Interest Rate Adjustment Mechanism inhibits its ability to set and control interest rates which can destabilize the banking sector.

Intergovernmental organizations and their member states enjoyed a transitory monopoly in global governance during a particular historical moment, when state hierarchies asserted their control over markets, internally and internationally. This Bretton Woods moment, in the decades after 1945, was an extension of the domestic regulatory state. Both before and after those decades, alternative forms of global governance emerged. During the interwar decades, networks and markets were embedded in private and hybrid modes of governing international monetary and financial affairs, cartels, and commercial arbitration. As liberalization encouraged by the Bretton Woods institutions expanded during the 1970s and 1980s, markets and networks resumed their earlier prominence in public and private governance. Economic globalization was a primary driver of this evolution in global governance, creating demand for governance as well as shaping supply.