It is by now widely accepted that a main underlying cause of the current global financial crisis was the same one that had fuelled similar episodes in earlier times: the excessive growth of credit globally over a long period of time and the associated high leverage in the financial system and in the non-financial sectors of some countries.
Central banks, through their monitoring and analysis of monetary and credit developments, can provide early warning signals about the building-up of financial imbalances that may lead to excesses in the financial markets – through various channels involving an under-pricing of risk and an increase in market liquidity that can fuel asset price bubbles which will eventually be followed by market corrections.