Basel II is an important milestone in banking regulation and supervision and ought to be viewed as a necessary process for promoting the safety and soundness of the banking sector and thereby strengthening financial stability. What is financial stability? In a situation of financial stability, financial institutions and markets are able to efficiently mobilise savings, provide liquidity and allocate investment.
The decline in size and importance of the unsecured interbank money market affects the pass-through to other maturities. A second set of objectives relates to central banks keeping a large balance sheet as a way to steer the supply of safe assets, particularly through the same RPP, to create very short-term safe assets.