This was a guest lecture for the module QLLM082-Regulation of Financial Markets.
Professor Charles Goodhart delivered a magisterial lecture on the origins of central banking and the history of supervision on Friday November 6, 2015 at CCLS. Drawing on his experience at the Bank of England (former chief economist and member of its first Monetary Policy Committee) and his expertise as the world’s leading authority in central banking, he enlightened the students in the Regulation of Financial Markets course with a 'tour de force' that covered over three hundred years of central banking history and forty years of international supervision. He contrasted in his lecture the different responses to financial crises by the competent authorities throughout the 20th century, explaining that while in the aftermath of the great depression in the 1930s restricting excessive competition became the hallmark of government intervention in financial markets, since the 1970s with the movement towards greater financial services liberalisation, the response to crises has been more supervision. (A major problem - he pointed out - was that liberalisation plus technology led to global banking, so that regulation in one country would lead to disintermediation). He also talked about the shift from emphasis on liquidity to emphasis on capital in the 1980s with the first Basel Accord and how after the global financial crisis, regulatory attention has turned again on liquidity (thought capital remains the key variable for sound banking). His remarks about the three myths that were in vogue prior to the great financial crisis of 2007-2009 : (1) that successful inflation targeting will prevent macro disturbances; (2) that absent such disturbances, Basel II will guarantee bank solvency and (3) that given bank solvency, access to wholesale markets - funding liquidity - was always assured, were particularly insightful. Finally, he discussed in his lecture what remains to be done in the field of financial regulation, in particular with regard to macro prudential regulation and the reform of the housing market finance. He was however rather critical of the structural reforms advocated by Vickers, Volcker and Liikanen.