Responsibilities of the Federal Reserve So what is the role of a central bank like the Federal Reserve in fostering financial stability? 2 Historically, episodes of financial instability and the sharp economic downturns that sometimes ensued were a driving force in the creation of the Federal Reserve itself.
What one needs to understand Page 5 of 19  is that while the payments offered by the existing management are usually spread over a long period, the new investors mostly come up with upfront cash payments. The choice before banks is: ‘illusory future payments’ vs ‘upfront real cash’.