In the event of a crisis, it is not unusual for central banks to expand their balance sheets. The greatest received wisdom in central banking is the lender of last resort (LOLR) function based on the Bagehot principle that, “the central bank should lend freely against good collateral at a penal rate”1.
In my remarks today, I would like to elaborate on the linkages and the dividing lines between macro-prudential supervision and monetary policy. I will structure my presentation in two parts. First, I will discuss the interactions between monetary policy and the financial system, showing how monetary policy can create the conditions for financial stability.