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

Erlend Nier

No 2009/070, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; financial system; public funds; buy side; credit risk; market conduct; value chain; Systemic Risk; Monetary Policy; Prudential Regulation; Crisis Resolution; de-facto role; response to banking sector stress; central banks incentive; a number of central banks; insider trading; business regulation; institutional independence; Financial sector stability; Central bank mandate; Special resolution regime; Global; East Asia; Europe; Africa (search for similar items in EconPapers)
Pages: 64
Date: 2009-04-01
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Citations: View citations in EconPapers (67)

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