Second, regulation and supervision of financial entities: This involves the formulation of prudential guidelines (capital adequacy and reserve requirements, provisioning norms, risk management standards), the monitoring of compliance with those rules (on-site inspection and off-site surveillance) and the imposition of sanctions in case of non-compliance. Third, safety net provisions: This involves decisions to restructure troubled banks as well as ‘honest brokering’.
Our experience in the United States has been that multiple objectives for policy do not undermine policy performance when the public is convinced that the central bank is committed to price stability over the long run. Indeed, the commitment to long-run price stability can afford the central bank some flexibility in employing its tools to address shorter-run economic issues.