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Financial Stability Frameworks and theRole of Central Banks: Lessons from theCrisis
 Erlend Walter Nier 
WP/09/
70
 
 
 
 
© 2009 International Monetary Fund WP/09/
70
 
IMF Working Paper
Monetary and Capital Markets Department
Financial Stability Frameworks and the Role of Central Banks: Lessons From the CrisisPrepared by Erlend W. Nier
1
 
Authorized by Hervé FerhaniApril 2009
Abstract
 
The depth and breadth of the ongoing financial crisis motivates a review of financial stabilityframeworks and within that the role of central banks in financial stability. This paper contributes in four ways. The paper reviews the tools that are typically at the disposal of central banks (including monetary policy). It then assesses the benefits and costs of an expanded role of central banks in financialregulation. The paper goes on to explore in detail the objectives, tools, and scope of financial regulation.Building on this prior analysis, the paper examines finally the design of regulatory structures. General principles that can inform the design of the structure are provided and strengths and weaknesses of existing structures reviewed. Two existing models are both characterized by a small number of agencies(the integrated model and the twin-peaks model). Since the optimal solution may be path-dependent andspecific to the development of the financial sector in any given country, a number of hybrid models arealso discussed.
This Working Paper should not be reported as representing the views of the IMF.
 
The views expressed in this Working Paper are those of the author(s) and do not necessarily representthose of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
 JEL Classification Numbers: G 28Keywords: Systemic Risk, Monetary Policy, Prudential Regulation, Crisis ResolutionAuthor 
’
s E-Mail Address:enier@imf.org 
1
This paper has benefited from comments and suggestions from A. Bhatia , J. Brockmeijer, H. Ferhani,K. Habermeier, D. Marston, A. Narain, and M. Swinburne.
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