Financial Stability Frameworks and the Role of Central Banks: Lessons From the Crisis

April 1, 2009

Preview Citation

Format: Chicago

Erlend Nier. Financial Stability Frameworks and the Role of Central Banks: Lessons From the Crisis, (USA: International Monetary Fund, 2009) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper sets out general principles for the design of financial stability frameworks, starting from an analysis of the objectives and tools of financial regulation. The paper then offers a comprehensive analysis of the costs and benefits of the two main models that have emerged for modern financial systems: the integrated model, with a single supervisor outside of the central bank, and the twin-peaks model, with a systemic risk regulator (central bank) on the one hand and a conduct of business regulator on the other. The paper concludes that the twin-peaks model may become more attractive when regulatory structures are geared more explicitly towards the mitigation of systemic risk-including through the introduction of new macroprudential tools that could be used alongside monetary policy to contain macro-systemic risks; through enhanced regulation and special resolution regimes for systemically important institutions; and a more holistic approach to the oversight of clearing and settlement systems. Since the optimal solution may well be path-dependent and specific to the development of financial markets in any given country, a number of hybrid models are also discussed.

Subject: Banking, Central bank mandate, Central banks, Financial crises, Financial sector policy and analysis, Financial sector stability, Special resolution regime, Systemic risk

Keywords: A number of central banks, Africa, Business regulation, Buy side, Central bank mandate, Central banks incentive, Credit risk, Crisis Resolution, De-facto role, East Asia, Europe, Financial sector stability, Financial system, Global, Insider trading, Institutional independence, Market conduct, Monetary Policy, Prudential Regulation, Public funds, Response to banking sector stress, Special resolution regime, Systemic Risk, Value chain, WP

Publication Details

Pages:

64
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/070
Stock No:

WPIEA2009070
ISBN:

9781451872170
ISSN:

1018-5941

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