The IMF’s Executive Board discussed the lessons from the crisis for central banks. Policymakers are beginning to incorporate the lessons of the crisis for policy frameworks, including those for systemic financial stability, prudential regulation and supervision, monetary policy, liquidity management, and crisis management.
Central banks were thus the main institutional focus of the discussion, although there were also implications for regulators separate from central banks. While the discussion considered mainly the issues facing advanced economies, the lessons are applicable to a wide range of economies.
The crisis brought the financial system to the verge of systemic collapse and raised the prospect of depression and deflation. Central banks helped defuse these threats, including through exceptional measures. Considerable efforts are now under way to draw policy lessons from the crisis. For central banks, the crisis seems to provide three important lessons for policy frameworks—mainly concerning systemic financial stability.
First, financial stability should be addressed mainly using macroprudential policies. They can mitigate the procyclicality of systemic risk and the build-up of structural vulnerabilities. Macroprudential tools include capital requirements and buffers, forward-looking loss provisioning, liquidity ratios, and prudent collateral valuation. All potentially systemic institutions and markets should be within the macroprudential regulatory perimeter. Central banks should play a key role, whether or not they serve as the main regulator. However, much work remains to be done to develop full-fledged macroprudential frameworks, including operational tools and governance and institutional arrangements.
Second, price stability should remain the primary objective of monetary policy. Central banks have maintained the price stability credibility they gained before the crisis and this public good must be preserved. The monitoring and analysis of financial system developments and risks can be better integrated into the formulation and implementation of monetary policy.
Third, the crisis showed that changes to central bank liquidity operations and broad crisis management frameworks are needed, including to address moral hazard. Changes to enhance the flexibility of central bank operational frameworks will improve the resilience of the system. Institutions and markets that are potential recipients of liquidity support in times of stress should be monitored and regulated. A continued and sustained effort to improve payment and settlement systems and crisis management coordination is also warranted.
Preserving price stability and central banks’ hard-won monetary policy independence should be a key focus of reform efforts. Institutional arrangements should ensure that the role of central banks in the design and application of macroprudential measures does not impinge on their ability to deliver price stability. The policy roles of the central bank, the government, and other entities need to be clearly delineated in the wake of the broadening of the scope of their interventions during the crisis.
Central banks and other public sector entities are enhancing the role of systemic financial stability in their policy frameworks. The Fund will continue to work closely with them in these efforts, including by helping develop the needed analytical tools, filling key data gaps, and disseminating information and lessons.
