Financial stability can be defined as a situation in which the intertemporal allocation of resources is felt to be “in equilibrium” or “sustainable”, which means that it is at the same time in line with the desires of individual agents and with the need to keep up with the debt obligations that have been subscribed.
The central bank should not create the incentives for private agents to accumulate debt continuously over time. Such an over-accumulation, especially in good times, may jeopardise its sustainability. Private agents – no differently from the public sector – may experience solvency problems.