Growing interlinkage among financial markets across the world is giving birth to many risks. These risks can be tackled only by higher level of cooperation among the regulators of various countries. Best practices in risk management, which emerge from Basel II, are the first step in the right direction. Still, massive information flow among regulators is required to make the financial system stable.

Central bank of the country may help in resolving the issue of financial instability with its experience and abundant resources. It is the central bank that could use such resources like liquidity in the market, primary data on non-public financial institutions, etc. To improve the resilience of the economy, the central bank by acting as `the lender of last resort' can reduce the risk in the economy. It can also reduce the risk in the economy by directly engaging in the payment system.

Apart from the steps the central bank could take to reduce the volatility, there is a need to enlighten the economic participants regarding risk management, which is equally helpful in maintaining the financial stability of the system. Mostly, the central banks are concerned with the economy of their country but the increasing interlink of the economies across the globe is forcing them to broaden their horizon. Though it is easy to say than finding the factors which turn into crisis, central banks based on their experience could find such factors for which a proactive approach is needed. Some of the factors we will discuss hereunder.

Professional Banker Magazine, Financial Stability, Financial Markets, Risk Management, Global Financial System, Market Participants, Operational Risk, Financial Management, Basel II, Globalization, Central bank, Global Economy.