The answer to this question involves various functions and potential actions of central banks, but I would like to stress the contribution which central banks can make by enhancing their monitoring of financial stability, by further developing the pertinent methodologies and models and improving the availability of the relevant data. This is, of course, no easy task.
Contagion effects and likely non-linearities in both the buildup of imbalances and their transmission across the financial system and to the real economy make the modelling of financial stability risks very complex. Moreover, assessing and estimating the likelihood of typically low probability events – the famous “black swans” – is exceedingly challenging. There is no time now to discuss these matters in detail.