Can financial institutions protect themselves from the financial shocks?

The Policy Board of the Bank of Japan announced today quantitative and qualitative monetary easing measures approved at the Monetary Meeting on 4 April, 2013. The main decisions involve doubled the monetary base and the amounts outstanding of Japanese government bonds (JGBs) to 270 trillion yen as well as exchange-traded funds (ETFs) to 3.5 trillion yen within two years, and more than doubled the average remaining maturity of JGB purchases to about seven years. The aim of the introduced measures is to achieve the price stability target of 2% in the consumer price index (CIP) at the earliest possible time within two years through reduced risk premia of purchased assets and increased lending to businesses.

Each financial shock undermines economy even financial stability of the financial institutions is sustained. Thus, the challenge to boost economic growth through increased liquidity and lending capacity of financial institutions may require enhanced credit supervision as additional money injected into the financial system could lead to the increased scope of credit crunch and magnitude of financial shocks. Taking into account the high connectivity between different markets and contingency effect of success and fail, is it possible to reduce central banks’ intervention by strengthened risk management of financial institutions?

The capital requirements to sustain financial shocks still remain the main tool of financial stability. So, the quality of capital of financial institution which enables to preserve value of equity during temporary financial shocks could be the main focus.