Thanks to those various policy responses, stability has been maintained in interbank funding markets, and investors’ risk aversion has abated somewhat in international financial and capital markets as a whole. The policy responses by the ECB and other policy authorities are indispensable for containing the vicious cycle of public finance, the financial system, and the real economy.
Prominent among them are proposals to (1) impose special taxes or capital charges on firms based on their systemic importance, (2) require systemically important firms to issue or maintain contingent capital instruments that would convert to common equity in periods of stress, and (3) reduce procyclical tendencies by establishing special capital buffers that would be built up in boom times and drawn down as conditions deteriorate.