Why Should the Central Bank Be Charged with Maintaining Financial Stability

  1. Financial Stability
  2. Financial Stability
  3. Why Should the Central Bank Be Charged with Maintaining Financial Stability

Maintaining Financial Stability is an Intrinsic Part of the Central Bank's Role

When the financial system becomes unstable, such as with financial market turbulence and deterioration in the soundness of financial institutions, a massive supply of funds is generally needed to solve the problem. Historically, the central bank has therefore naturally performed the role of promoting financial stability, since it has the ability to promptly inject a huge amount of liquidity by virtue of its exclusive right to create fiat money.

Financial Stability Enhances the Efficiency of the Central Bank's Monetary Policy

The financial system provides much of the information needed by the central bank to implement its monetary policy. It is also a major channel through which the effects of monetary policy are transmitted to the real economy. Financial system instability causes a decrease in the usefulness of the information variables used for monetary policy, including price variables and transaction movements in the financial markets, and the lending behaviors of financial institutions, and thus reduces policy efficiency. Consequently, the central bank places high value on financial stability, so that the efficiency of its monetary policy can be enhanced.

The Central Bank Has a Comparative Advantage in Analyzing Financial System Stability

The factors causing shocks and the paths of shock transmission have become diversified and complex, influenced by the great strengthening of linkages between domestic and overseas financial markets, and between financial markets and financial institutions, following the progress of financial liberalization and globalization. Against this backdrop, it is essential not only to analyze the stability of individual financial institutions and individual financial markets, but also to assess stability in terms of the overall financial system, by considering the domestic and overseas macroeconomic environments. The central bank is well-suited to meet this need, since it has a comparative advantage in the analysis of financial system stability. Macro-analysis of the entire financial system, in particular, is considered a crucial foundation for ensuring financial stability.

The Central Bank Seeks to Ensure Financial Stability through Effective Operation of the Payment and Settlement Systems

Financial stability can be maintained when trouble-free payment and settlement among individual economic agents is secured. This is because failure by a particular economic agent to make timely payment or settlement may cause delay or paralysis across the entire payment and settlement system, and thereby disrupt the financial system as a whole. Given this, the central bank seeks to ensure financial stability by effectively operating and monitoring the payment and settlement systems.