Central banks question role during crisis

18th May 2009, Comments 0 comments

The world's biggest central banking body BIS meets in Basel to discuss their role in protecting financial stability.

BASEL - The financial crisis forced central banks to take on "significant" risks, raising the issue of their role in protecting financial stability, the BIS said Sunday.

"The current crisis has raised important questions about the role of the central bank in the prevention, management and resolution of financial crises," said a statement from the Bank for International Settlements.

In order to deal with the crisis, central banks engaged in "new and unusual transactions" with a wider range of parties than before, said the statement from the world's biggest central banking body.

"As a result, the composition and size of their balance sheets have changed dramatically, and they have assumed significant financial and reputational risks," it added.

The Basel-based institution, which is known as the central bank of central bankers, said the crisis raised fundamental issues about the tools national banks could use.

National central banks are typically responsible for maintaining monetary stability, including managing inflation by setting lending rates.

But during the financial crisis, central banks took unprecedented action including creating "bad banks" to help ailing banks isolate their illiquid assets.

They also added an extraordinary amount of liquid cash into to help markets flow again.

In its most recent action, the European Central Bank plans to buy bonds in euros, adding EUR 60 billion (CHF 90 billion, USD 80 billion) into the financial system.

The BIS noted that once the crisis is resolved, central banks must reconsider their role in maintaining financial stability.

AFP / Expatica

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