What then is the role of central banks in this new financial landscape, where institutional investors and other nonbank financial institutions hold a larger share of assets and a larger share BIS Review 108/1998  –3–  of credit risk than they ever have before – and where an increasing share of conventional credit risk is intermediated through the capital markets? I would argue that the role of a central bank in this new environment is very much in keeping with its traditional responsibilities. Central banks in all countries fundamentally care about the flow of credit in their economies, whether this credit flows from banks, nonbank financial institutions, or institutional investors. Why is this so? The answer is simple. It is because the credit intermediation process is ultimately what determines how well our economies function and therefore how well our economies are able to grow and allow their citizens to prosper. When the credit intermediation process does not work well, when there are disruptions to the supply of credit to the economy, as history has amply shown, the costs for our businesses and our people can be enormous in terms of lower output and fewer jobs. A well-functioning credit intermediation process is, in short, critical to the sustainability of any economy’s success. It is for these reasons that central bankers are interested in the flows of credit from the global securities markets, just as we have needed to know about the flows of credit from the banks whose operations we are charged with overseeing.
On an average day, over $ billion in Treasury securities changes hands, about seven times the value of stocks traded daily on the New York Stock Exchange. All of this trading activity serves the very important function of price discovery. More than any other securities market in the United States, the Treasury market responds forcefully to new information about macroeconomic fundamentals. The days when the most intense trading activity takes place are also the days when major reports are released on such indicators of U.S. economic performance as the employment report, the consumer price index or the producer price index. These releases allow market participants to digest important new information and to review their expectations about where the economy is going. The interest rates on Treasury securities of varying maturities are the market’s most important signals about the U.S. economy’s prospects for growth and risks of inflation. In the rest of the fixed-income market, trading in corporate bonds, mortgage-backed securities and sovereign debt also serves the price discovery process. This trading activity acts to differentiate, for example, a triple-A risk against a triple-B risk, the prepayment risk of mortgages against the prepayment risk of credit card receivables, and OECD country risk against emerging market risk.