The role of central banks in crisis management – how do financial crisis simulation exercises help?

The fundamental task and responsibility of central banks is to maintain and promote the stability of the financial system. In order to achieve this, central banks strive to prevent crises using all the instruments at their disposal. If a crisis occurs, central banks play a significant role in efficient crisis management and the crisis resolution process. In spite of the crisis prevention activity of the authorities – including central banks – crisis events can not be avoided. The crises potentially emerging in modern banking systems are basically the consequence of the imperfect functioning of financial markets. In addition, external shocks can trigger crises as well. In order to support the stability of the financial intermediary system and to help restore market confidence, there may be a need for central banks to carry out aggregate liquidity increasing measures which affect the market as a whole and for emergency liquidity assistance based on individual consideration, in line with the ‘lender of last resort’ function. Continuous development of crisis management work and the related instruments is needed in order to ensure quick and efficient central bank decisions. One of the most important elements of crisis management is the organisation of crisis simulation exercises. Within the European Union, special emphasis has been placed on the development of a crisis management framework aimed at promoting more efficient co-operation between the competent authorities, since a significant number of cross-border banking groups have been formed throughout Europe recently. A potential crisis in a parent bank’s country affecting a larger banking group may jeopardise the stability of the financial intermediary system in the countries of subsidiary banks as well, through the interrelationships within the group. This article outlines the significant assistance that these exercises can provide for central bank decisions and for the development of co-operation between authorities.