The idea of considering financial stability as a possible constraint on monetary policy rather than a target is consistent with the general idea of seeing financial stability, from a monetarypolicy point of view, as an aspect of the transmission mechanism of monetary policy, where a reduction in financial stability typically changes the transmission mechanism and makes it less efficient. Asset prices and bubbles The previous discussion has focused on what the central bank should do when it faces an ongoing crisis, or receives signals that a crisis is underway. A related issue is to what extent the central bank should take account of asset prices and, in particular, potential asset-price bubbles. In the forecast targeting framework described above, asset prices will affect policy to the extent they are deemed to affect the forecasts of the central bank's target variables, that is, inflation and resource utilization. Suppose, however, that a large asset-price increase is deemed to be fragile and a possible bubble, with a significant risk for a future collapse. Suppose further that a future collapse is deemed to have undesirable consequences for future inflation and resource utilization. Then the bank faces a delicate situation.
Chart 10: Bank and hedge fund concentration  35  T op 5 as % of sample assets  T op 5 assets % of top 1000  30  18 16  Global banks (RHS)  14 25 12 20  10 8  15 Hedge funds (LHS)  6  10 4 5  2 2009  2008  2007  2006  2005  2004  2003  2002  2001  2000  1999  0 1998  0  Source: TASS and The Banker  18  BIS Review 139/2009  Figure 1: Payoff profile for bank equity  β=1  Return on Bank Equity  Return on Market Portfolio  Socialised losses  Figure 2: Payoff profiles for bank equity  β=2 Return on Bank Equity β=1  Return on Market Portfolio  Leverage-induced social losses  BIS Review 139/2009  19  Figure 3: Payoff profile for bank equity  Return on Bank Equity  β=1  Return on Market Portfolio  Risky-bet induced social losses  20  BIS Review 139/2009