Discussion as to the institutional arrangements that are most appropriate from the point of view of financial stability remains open. One key question is who should be responsible for the tasks of prudential regulation. Another, although perhaps slightly less important, is who should do the supervision. There are arguments in favor of different policy options, but any specific recommendation must take into account the experience and circumstances of each country. Until the crisis, the prevailing trend was for a body different from the central bank to be responsible for regulation and supervision whereas now the wind seems to be blowing in the opposite direction. In this context, one piece of practical advice is not to significantly change something that has worked well. In any case, the decisions that are taken may have significant implications for central banks’ institutional insertion, the scrutiny to which they are subject, and internal organization of their activities. These implications become particularly important if it is decided to give the central bank broad responsibility for financial stability. In this case, it may be advisable to adjust internal governance so as to ensure the necessary separation of the objectives of financial stability and price stability. Under any institutional model, coordination and communication between the different authorities with functions related to financial stability will always be very necessary.
Many of these instruments, such as providing liquidity, are inherent or traditional while others, such as regulating and watching over payment systems, have developed in recent decades. The experience of the last few years has suggested a need to review or update the available instruments and to generate the operational conditions in which they can be used without delay when needed. During this latest crisis, for example, many central banks were not operationally prepared to receive collateral that was not in habitual use. It has also been suggested that there is a need to incorporate new instruments, principally with a macroprudential approach. However, in the case of some of these instruments – specifically, the use of regulation for countercyclical purposes – evidence is scarce and debate as yet inconclusive. However, beyond the contribution that a central bank can make, financial stability requires a comprehensive framework of financial institutions, policies and practices. The solidity of this framework and its consistency are crucial. Regulation and supervision, whether or not in the hands of the central bank, are critical, but so too are monetary and fiscal policy. The recent sovereign debt crisis in Europe, for example, has demonstrated the importance of fiscal conditions for financial stability. Market discipline and institutions’ management, although discredited by the crisis, are factors that can, with an appropriate regulatory framework and incentives, contribute to stability. The efficiency of regulation and supervision should, in the end, be reflected in good behavior by institutions and the proper functioning of markets.