Better management of the creditworthiness of counterparties in monetary policy operations Monetary policy operations expose the central bank to credit (and other) risks, which are controlled through adequate collateral and other risk management techniques. Good banking supervision and prompt corrective action ensure the soundness of counterparties in these transactions and a central bank therefore has particular incentives to make sure its supervision is rigorous.
Rigorous supervision, in turn, protects the central bank’s balance sheet and gives it greater control over it, also safeguarding the central bank’s independence and credibility. This is an important point. As the central bank has a direct interest in strong supervision, the risk of financial dominance over monetary policy becomes less likely, i.e.