Central bank tasks

Safeguarding the stability of financial systems at a national and an international level is an important issue for central banks and governments owing to the potentially major macroeconomic costs of disruptions to financial systems.

Central banks’ interests in fully functioning financial systems originate in the key role that financial systems, especially banks, play in monetary policy. Disruptions in the financial system can delay or hamper the transmission of monetary policy impulses to the real economy. Asset price bubbles or a credit boom can undermine the basis for price stability in the mid to long-term. Confidence in the currency and in the functional viability of the financial system therefore go hand-in-hand and are interdependent.

Finally, a central bank is also interested in the development of the financial system because the need of individual financial market participants for liquidity can rise suddenly and sharply in the face of shocks and imbalances. In integrated financial markets, such shortages of liquidity can be transmitted quickly and, especially if they reach systemically important market participants, have a negative affect on the financial system as a whole. As the sole source of central bank money, the central bank may therefore have to play a prominent role in resolving financial crises; however, to date the Bundesbank has not had to step in as a lender of last resort.

Safeguarding the stability of the financial system is therefore a primary task of central banks. The EC Treaty (Article 105, paragraph 5) clearly assigns a share in the responsibility for financial stability to the European System of Central Banks and therewith also to the Bundesbank.