Central banks possess comparative advantages of information and action as they combine complementary elements such as oversight of payment systems, their own refinancing operations, their activities in the financial markets and their presence in international committees. In addition, only central banks can perform the vital function of the lender of last resort for the banking sector during financial crises.
This, in turn, requires that central banks constantly keep abreast of financial institutions’ solvency situations and of liquidity conditions in the money market. They are therefore able to assess possible domino effects. Central banks’ market proximity in the regulatory and supervisory process clearly enhances their ability to identify disequilibria and proactively counter potential pockets of instability.