The recent financial crisis brought
the global financial system to
the verge of systemic collapse and raised the threat of prolonged
depression and deflation. While central banks have been blamed for
policies and actions that got the world into the crisis, they have also been praised
for leading the world out of it. Although the worst is behind us, considerable
efforts are still under way to draw policy lessons from the crisis and map risk
management strategies accordingly. The core issue of preserving systemic
financial stability and ensuring the safety of the banking system is something
that can never be compromised, and hence, central banks have the
responsibility for putting in place effective risk
management strategies for the financial system.
A glance at the unbelievable global financial meltdown of 2008-09
shows that it was a crisis waiting to happen due to the inherent weakness in the
global financial architecture, regulatory lapses, built-up global imbalances,
creation of asset bubbles, overshadowing of real sector by financial sector,
opaque market practices, inappropriate valuations, etc. One of the main reasons
for such a severe impact was that the banking systems of many countries had
built up excessive on and off-balance sheet leverages. At the same time,
many banks were holding insufficient liquidity buffers. The banking system,
therefore, was not able to absorb the pre- and post-crisis trading and credit
losses, nor could it cope with the re-intermediation of large off-balance sheet
exposures that had built up in the shadow banking system. The crisis was further
amplified by a pro-cyclical deleveraging process and also by the
interconnectedness of systemic institutions through an
array of complex transactions. |
