Abstract

The two core functions of central banks are monetary stability and financial stability. We explore in turn what is meant by each of these concepts, and consider the effects of internationalization on them. The internationalization of commercial banking, although in many ways capable of being handled by national central banks, does create for them a problem which by its nature is one they cannot, and never will, solve. In the European Union we can expect that this experience might ultimately lead to the development of a new transnational body or the assigning of powers to an existing institution such as the European System of Central Banks (ESCB). Outside the European Union, the solution is less obvious.

Introduction

Central banks, with one important exception, remain national, but commercial banking has become increasingly international. The aim of this chapter is to explore the problems this creates for central banks. To do so we first consider the functions of central banks to better understand which of their functions may be impeded by the internationalization of commercial banking. In summary, their two core functions are monetary stability and financial stability. We explore in turn what is meant by each of these concepts, and consider the effects on them of internationalization. That discussion prepares the way for examination of what can be done, and, perhaps, what should be done, to deal with how internationalization of commercial banking affects or impedes the carrying out of these central bank tasks.