The role of a modern central bank in managing consumer bankruptcies and corporate failures : a South African public-law angle of incidence

Abstract

Most people know little about their country's central bank; so far as they are concerned, a central bank is merely involved in determining the interest rate on their home loans and overdrafts. As recent events in the global financial markets have shown, however, there is more to a central bank than lending rates and signatures on banknotes. On Wednesday, 8 October 2008, world central banks intervened in an effort to alleviate clogged money markets and reinstil confidence in the panic-stricken international financial system and the global economy. Six central banks, including the United States Federal Reserve, the European Central Bank and the Bank of England, cut interest rates together. Other central banks that also cut interest rates included those of Canada, Sweden, and Switzerland. China also cut interest rates, though it did not join in the group statement. This was the first coordinated interest rate reduction since the terrorist attacks in the United States of America in September 2001. The global economy is showing clear signs of financial duress and distress. National and international media reports are dominated by references to higher energy prices, higher food prices, a slowdown in economic growth, monetary instability and the ever-present fear of uncontrollable inflation. These concerns prevail not merely in one or two countries, but worldwide, involving some of the biggest economies and monetary role-players. Regular reference is made to the 'credit crunch' and sub-prime mortgage crises in the United States of America that have created extra-territorial financial losses in Europe and the United Kingdom in particular. There is a significant downturn in the United Kingdom housing market, whilst the European Union is experiencing a definite economic slowdown. The consequences of these issues are not only of concern to private companies, financial institutions and multinational corporations, but are equally important to all governments, public institutions, and ultimately every human being. As a result the turmoil in financial markets has a global impact, and quick and decisive steps would indeed be in the interest of both public and private sectors. Although often forgotten, the poorest people of the world are the hardest hit in troubled times. Every government has a responsibility to act, taking appropriate steps to protect its people and ensure that appropriate mechanisms are in place to aid them during difficult times. The central bank is one of the most important institutions created to manage economic growth and fiscal stability in a country. It is customary for most states in the world to create and empower a specific institution to manage and oversee certain financial powers and functions. These institutions are of particular importance for financial markets and local economies because the proper fulfilment of their functions is directly attributable to economic growth, inflationary control and financial stability. Central banks were established throughout the world because of the realisation that under typical, normal conditions of banking and financial business, it was advantageous to have centralised monetary reserves, currency control and credit management that enjoyed the support of the state and were subject to some form of governmental supervision and participation. A central bank should be created by legislative intervention as a core pillar within a particular financial system. Given the differences of circumstances and political structures, the central banks in each country have different constitutional positions. However, these banks not only act 'offensively' (pro-actively), but are often also called upon to act defensively in times of financial trouble and instability. Although it must be noted that the creation of central banks is no guarantee against financial crisis, their quick and committed fulfilment of their powers and functions should have an important impact on financial markets, with resultant benefits for consumer bankruptcies and corporate failures and liquidations.