A widely accepted definition of financial stability is the ability of the financial system to perform its key functions efficiently, namely, the allocation of capital and risks and the settlement of payments and securities transactions. These functions must be fulfilled smoothly not only in normal times, but also during periods of structural adjustment and stress.
For obvious reasons, supporting financial stability is an important objective for central banks – and has always been so. First, as noted above, monetary policy is largely transmitted through financial market operations. Hence, the effect that monetary policy has on the real economy depends crucially on the smooth functioning of financial intermediaries and financial markets.