Principles for dealing with financial stability risks

Abstract

Financial crises and their associated risks pose a major challenge to governments, in particular to Ministries of Finance. In dealing with these risks, action is often characterised by critical international or European processes. However, considering the lessons learned over the last years, a case could be made for a public sector approach to dealing with the risk of financial crises that builds on five principles: (i) All relevant information should be available to the supervisory authorities; (ii) There needs to be macro-prudential oversight; (iii) Rules must be in place that ensure consistent incentives so that the market's natural allocation and monitoring roles achieve their full potential; (iv) The financial system should be sufficiently resilient; (v) Supervisory authorities should be sufficiently vigorous and closely cooperating. The ‘multi-layered’ nature of the approach is no substitute for quality in each layer, ie highest importance is assigned to ensuring quality in each layer.