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FINANSMARK-Finansmarkedet

Central banks expanding role in financial markets

Alternative title: Sentralbankers utvidede rolle i krisetider

Awarded: NOK 3.7 mill.

In the aftermath of the outbreak of the Global Financial Crisis in 2007 and again today in response to the covid-19 pandemic, we see that central banks have gained an expanding role in economic crisis management. In particular, there has been an unprecedented increase in central bank purchases of financial assets in the market in an attempt to stretch out a giant public safety net across the financial system and stimulate economic growth. Also the climate crisis influences economic and financial stability. To an increasing extent we see that central banks engage, or are asked to become engaged, in the issue. Voices in civil society and academia argue that central banks should include climate risks when assessing and mitigating financial risk, and when investing in financial assets themselves. Both the increase in investments in financial assets and the inclusion of climate risk in central banking operations has distributive consequences. This means that the central bank is expanding into what has traditionally been the domain of the parliaments, such as fiscal and climate policy. This development where central banks are given an expanding role in crisis management comes with a paradox. On the one hand, it prompts the question of whether central banks have abrogated to themselves powers which are not in the mandate provided by parliaments. This is particularly important question as central banks typically are independent administrative bodies. On the other hand, in particular the increase in central bank purchases of financial assets may have created new restrictions for the central banks. Being actors on financial markets, central banks are increasingly bound by private law, such as contract and financial market law, in a way that may inhibit the institutions? ability to fulfill their mandate of ensuring monetary stability. This research project will examine this paradox by analyzing how domestic and international law, public and private, both facilitate and limit central banks expanding role.

In the aftermath of the outbreak of the Global Financial Crisis in 2007 and again today in response to the covid-19 pandemic, we see that central banks have gained an expanding role in economic crisis management. The expansion is particularly seen in the unprecedented increase in central bank purchases of financial assets in the market to stabilise the economy. We have also seen that central banks’ areas of competence have expanded into that of other public institutions, e.g. the parliament and financial supervisory authorities. In 3 work packages (WP), the project explores how the law facilitate and limit central banks’ expanding role. WP1 analyses how domestic administrative and constitutional law, as well as international law draw up the outer limits of central banks’ expansion. WP2 examines whether private and financial market law applicable to central banks’ operations may constitute obstacles for their ability to ensure monetary and financial stability, as the rules originally are tailored for actors with commercial objectives. While WP1-2 focus on Norwegian developments, WP3 explores how international institutions and international law developments facilitates central banks’ expansion. Legal research on central banking is typically dominated by domestic administrative and constitutional law approaches. This project takes a comprehensive and multilevel approach, analysing how domestic and international law, public and private, together shape the legal framework governing central banks’ operations. The project is of a descriptive nature, relying on textual analyses of a broad spectre of different publicly available legal sources. The project consists of 1 project manager, 2 academic participants (professors) and 1 postdoc from the University of Oslo. A reference group of Norwegian and international legal scholars and central bankers is established to provide high quality input to the project participants.

Funding scheme:

FINANSMARK-Finansmarkedet