The Role of Central Bank in Crisis Management

Abstract

The fundamental task and responsibility of central banks is to maintain and promote the stability of the financial system. In order to achieve this, central banks strive to prevent crises using all the instruments at their disposal. If a crisis occurs, central banks play a significant role in efficient crisis management and the crisis resolution process. In spite of the crisis prevention activity of the authorities - including central banks - crisis events cannot be avoided. The crises potentially emerging in modern banking systems are basically the consequence of the imperfect functioning of financial markets. In addition, external shocks can trigger crises as well. In order to support the stability of the financial intermediary system and to help restore market confidence, there may be a need for central banks to carry out aggregate liquidity increasing measures which affect the market as a whole and for emergency liquidity assistance based on individual consideration, in line with the ‘lender of last resort’ function. Continuous development of crisis management work and the related instruments is needed in order to ensure quick and efficient central bank decisions. This article outlines the significant assistance that these exercises can provide for central bank decisions and for the development of co-operation between authorities.