The central bank’s role is reduced to creating the right incentives to avoid speculative or precautionary financial outflows. The surest way to do this is to maintain a domestic interest rate policy which follows the US Treasury bill rate, with allowance for a small risk premium, which will vary from country to country.
Banks would do well to approach stress testing not merely as a regulatory requirement but as an integral part of their risk management processes and Basel II implementation. The stress test results need to be suitably integrated into the risk management processes, business strategies and capital planning.