Finance crisis raises questions on roles of central banks: BIS

BASEL, Switzerland (AFP) — The financial crisis has forced central banks to take on “significant” risks, raising the issue of what role they should play in safeguarding financial stability, the BIS said Sunday.

“The current crisis has raised important questions about the role of the central bank in the prevention, management and resolution of financial crises,” said a statement from the Bank for International Settlements.

In order to deal with the crisis, central banks had engaged in “new and unusual transactions” with a wider range of parties than before, said the statement from the world’s biggest central banking body.

“As a result, the composition and size of their balance sheets have changed dramatically, and they have assumed significant financial and reputational risks,” it added.

The Basel-based institution, which is known as the central bank of central bankers, said the crisis raised fundamental issues about the tools national banks had at their disposal and their capital cover.

National central banks are typically charged with the key function of maintaining monetary stability, including keeping inflation under check. They do so by setting lending rates.

But during the financial crisis, central banks have had to take unprecedented action including creating “bad banks” to help ailing banks isolate their illiquid assets.

They have also pumped an extraordinary volume of liquidity into clogged markets to get them flowing again.

In its most recent action, the European Central Bank broke new ground with a plan to buy bonds denominated in euros, thereby pumping 60 billion euros (80 billion dollars) into the financial system.

The BIS noted that once the crisis has been resolved, central banks would have to look at the role they should play in future in maintaining financial stability.

For instance, if central banks were to be given an additional mandate to watch systemic risks within the financial system, the question of whether or not they required new tools to do so would arise.

And if the scope of central bank operations was increased, how should losses be borne if they occured and how much in capital should they have?