Role of central banks in the current credit crisis

Abstract

This project focuses on the ongoing credit crisis in the major developed financial markets of the world and the role of central banks in managing the crisis in general as well as a critical analysis of their handling of the rescue of troubled financial institutions as fallout of the ongoing crisis. The central banks considered in the project scope are the Federal Reserve of United States and the Bank of England of UK. The project also attempts to compare and analyse the approach of these two central banks due to the striking similarities of the problems they are facing and the differences inherent in their approach to resolve the crisis. The attempt at comparison is to try to look at, what is, essentially the same, problem from the perspective of different worldviews and thereby gain a more in depth understanding into the nature of financial crises and different macro and micro level policy tools that can be applied for its resolution. The project report is divided into three logical parts. The first part tries to briefly understand the broader context in which the two regulators operate and their guiding philosophy and principles. The second part focuses on understanding the evolution of the credit crisis and its impact on financial markets and institutions. The last part analyzes the response of the central banks to the crisis and compares the approach taken by the two central banks. Finally, the conclusions and recommendations resulting from the above analysis are presented.