Consolidating supervisory architecture and mitigating systemic risk : the Role of Central Banks

Abstract

This paper argues that the role of central banks within financial markets should be increased. If central banks are to be responsible for financial stability, they should retain some supervisory capacity. There are synergies between the supervisory function and its capacity to act as lender of last resort. Payment and settlement systems are also essential to reduce systemic risk. This paper also addresses mitigation of systemic risk, which was not appropriately managed during the crisis. An integrated supervisory approach is appropriate to deal with financial conglomerates and the parallel banking system. In order to improve the mechanisms and adequately diminish the likelihood of systemic risk, central banks need useful tools, including the power to regulate and supervise financial markets. Overall, the best approach for a developing country with a small financial sector is to adopt a single entity structure, preferably with the central bank in charge.