Explains why financial stability is important for official policy: its disruption leads to huge economic costs. Analyses why the involvement of the public sector is necessary to ensure stability; market self‐interest is not sufficient because of externalities, meaning that individual firms’ decisions take into account only their own costs and benefits. Outlines the kinds of action needed: ex ante, the authorities can influence the robust shock‐absorbing capacity of the system by levering capital and liquidity buffers, and oversee the financial infrastructure of payment, clearing and settlement systems. Indicates the balance that has to be made between system safety and the cost of buffers or system improvements. Goes on to the authorities’ influence over market discipline, and to the need for crisis management on certain occasions. Stresses also the importance of market integrity and concludes with the international dimension to financial stability policy.
Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited