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’.
It also involves the operation of financial safety net in the form of deposit insurance. Fourth, Liquidity: The response to a crisis may necessitate judicious use of the emergency liquidity assistance facilities in order to avoid disruptions from disorderly failures and to contain contagious strain. Only central banks can inject liquidity.