Risk Management, PRMIA

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August 21, 2007

Central Banking and Risk Mitigation

The recent financial disturbances in the US and expected ripples in other financial markets across the globe has brought to the fore the role of Central Banks in the present world financial order. Indeed, the swift signalling and action by FED and other central banks indicated that while steering their banking systems towards Basel II, central banks are far more alert today than a decade back. The concern for correcting liquidity mismatches was evident as many central banks talked about their intention to give liquidity support to bail financial institutions out.

As a matter of fact, Fed's inter-meeting move to cut its primary
credit rate (Discount rate) by 50 bps to 5.75% on August 17 and allowing depositories to borrow upto 30 days alongwith its willingness o accept a ‘broad range of collateral’ for the loans,
was an acknowledgement of the liquidity risks in the economy .

What about Inflation Targeting ?

Tellingly, the FOMC omitted any reference to inflation risks from the inter-meeting statement. This signals a welcome respite fronm central banker's obsession with Inflation targeting. Too early to say this very strongly as the subprime saga unfolds, but the last few days shows that the Central Banks do have a broader mandate in financial market and can play an effective role in mitigating adverse market shocks.

Multiple objectives of monetary policy, as practiced in India for instance- growth, price stability and financial stability seems to be the way ahead.

Posted by sunandoroy at August 21, 2007 07:16 AM

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