The contribution of prudential supervision to economic development proceeds along two dimensions. From a preventive perspective, supervision has to make sure a steady and comprehensive monitoring of all the potential threats to financial stability. The function of supervision can be crucial after the emergence of a crisis, in order to provide for a swift and ordered resolution. Supervisors can only be effective in these two respects if they can pay enough consideration to systemic issues, namely the chance of contagion effects. The interplay between financial markets, financial development and financial policy is by no means a new issue for central bankers. However, monetary market developments have brought the question to the forefront of the coverage debate.
The hedge fund investments in subprime mortgages and other derivatives brought on the 2008 international monetary disaster. The Committee engages in world financial surveillance and analysis of monetary markets and intermediation to evaluate which frameworks and insurance policies are successfully contributing to economic progress. If bond buyers were risk impartial, then the time period construction of rates of interest could be determined by short-term interest rate expectations. But bond investors are risk averse, which means that they’ll normally demand a danger premium for investing in even default-free authorities bonds. This danger premium will typically rise with the maturity of these bonds because longer-dated government bonds are typically much less negatively correlated with consumption and, subsequently, characterize a much less useful consumption hedge for traders.