The pursuit of financial stability

Quarterly Bulletin 1994 Q1
Published on 01 March 1994

In 1992, in the first LSE Bank of England lecture, the former Governor discussed the case for price stability. In 1993's lecture, the Governor discusses the Bank's approach to the other main group of central bank responsibilities: preserving the stability of the financial system. The Governor argues that the close, two-way interdependence with monetary stability means that the preservation of systemic stability is inevitably a matter of concern to central bankers. Financial stability is maintained both through supervision and intervention (the 'lender of last resort' role). The Bank aims to prevent or contain pressures on the system through supervision. The Governor surveys the evolution of the Bank's supervisory role, and defines the essential task of central banks in supervision as to preserve the system's stability without unduly constraining the ability of financial businesses to service the wider economy. Systemic supervision sits comfortably with newer responsibilities to protect the interests of the depositors in individual institutions. The Governor moves on to explain the key questions the Bank considers when deciding whether and how to intervene in its role as lender of last resort, and considers the experience of recent cases. He says that it may often be necessary to conduct specific operations in secret, and so it is important that the Bank should explain the basis of such operations; he outlines the principles that guide decisions on intervention.

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