Central banks emerged from a long development phase with the responsibility of implementing monetary policy. The crisis has shown that their responsibility is in fact much broader.

Central banks are in charge of managing currency supply and short-term loans, the availability and circulation of which keep the economy going. The major central banks (e.g. the Federal Reserve in the US, the ECB in the euro area, the Bank of Japan, etc.) are public or semi-public institutions whose by-laws determine their degree of independence from the government and, more importantly, their objectives. The Fed’s purposes relate firstly to the employment rate and secondly to price stability, which is also the only duty assigned to the ECB by law.

The main tool at their disposal is the short-term interest rate, or policy rate, because it is established on an administrative basis by issuing establishments.  This is the price that commercial banks pay to refinance their debt with the “banks’ bank”, which in term plays on long rates determined by market operators. The credibility of the central banks designates their ability to influence the behaviour of consumers and companies in order to reach their objectives.

The crisis has shed light on another of their responsibilities. At the hub of the payment system, central banks have used every weapon in their arsenal to support banks threatened by the drying-up of liquidity:  interest rate cuts, increased loan volumes, regulatory influence, and even “unconventional” means (intervention on the fixed income and forex markets). Combined with the loans issued by the governments, these measures have helped to prevent a series of payment defaults embodying systemic risk. By becoming lenders of last resort, the central banks have reminded everyone that in addition to fulfilling their monetary policy duties, they also supervise and ensure the stability of the financial system as a whole.