Price stability and financial stability are two inseparable poles. Price stability, by anchoring the anticipations of agents and so reducing the volatility of markets, contributes to financial stability.
Conversely, financial instability may jeopardise price stability by altering the various channels at work during the monetary transmission mechanism. For example, the bursting of a speculative bubble may contribute to a deflation process through the deterioration of the wealth effect (effect causing a variation in household consumption according to the value of the assets they hold). Likewise, an exchange crisis may generate a depreciation of the exchange rate which increases imported inflation. While central banks’ intervention following financial crises is controversial, essentially because of moral hazard considerations, it is beyond doubt that their prior intervention is crucial.
The missions of the ESCB regarding stability are twofold: to contribute to policies initiated by the competent authorities with regard to the prudential supervision of credit institutions and to the stability of the financial system and promote the smooth functioning of payment systems.
Besides its European activities, the BCL has set up macro-prudential indicators which record the general development of the Luxembourg financial system.
Because of the systemic importance of payment and settlement systems in this field, the law has in principle entrusted the provisional surveillance to the Commission de surveillance du secteur financier (CSSF) and by way of exception to the BCL. Thus, the BCL is legally responsible for the supervision of the payment systems in which it takes part.
Critical market participants, especially infrastructures and institutions of systemic importance, have to work properly under all circumstances in order to sustain financial stability. With regards to large-scale operational disruptions, the Banque centrale du Luxembourg has put in place two structures with the aim to improve the preparedness of the Luxembourg financial sector (Operational Crisis Prevention Group-OCPG) and, if necessary, to act as coordinator and catalyst (Operational Crisis Management Group- OCMG) to keep consequences minimal.