Monetary policy can therefore affect financial players’ willingness to take risks. And it also influences banks’ propensity to run risks in another, unintentional way: the more a central bank protects banks against potential risks and leads them to believe that they will receive central bank funding if the worst comes to the worst, the less wary they will be of taking on excessive risk.
The need for a very close connection between the central bank and the supervision of banks features in an important report issued in April this year by the Financial Stability Forum (FSF) entitled “Enhancing Market and Institutional Resilience”.