Traditionally, the stabilization of price level and business cycles
taming is a vital priority of monetary policy, while the potential trade-offs
of financial stability are assumed less actuality (Woodford, 2012). However,
the various researchers argued that position of monetary policy might influence
the perception or resistance of banks towards to the potential risks, change
their risk-taking conditions, by undermining the soundness of the monetary
area. For instance, the widely employed
and prolonged low interest rate policy around the world in the aftermath of the
global financial crisis has also raised the concern that, central banks should
adopt a “leaning against the wind” policy by keeping the rate cut for
short in order to curb banks’ risk-taking incentive (Acharya and Naqvi, 2012;
Agur and Demertzis, 2012).
The emergent Global financial crisis is a disorder of the financial
systems of many states simultaneously; accompanied by inflation, unstable
exchange rates, the devaluation of national currencies, and a general decline
the functions of monetary policy, which in turns has an effect on the operation
of the banking system. First, emergent monetary issues caused acute liquidity
among the banks, which prompted the credit crunch marvel. Due to the subsequent
deficiency of capital, the banks progressively become risk-averse about lending
to organizations and individuals as well as to the other banks in general. (Lowth et al., 2010).
Second, the slow recovery of the economy signals about the worse economic
conditions than expected (Haitsma et al., 2015), and such pessimism results in the
hesitation of banks to take any risks.
The reestablishment of financial stability in banking system after the
following crisis has been viewed as a basic expectation for policymakers and
scholars. Specifically, with BCBS (Basel Committee on Banking Supervision) at
the focal point of considerations, controllers and policymakers have
highlighted the basic significance to such security of adequate capital
cushions and sound liquidity chance administration. As they underlined a
principal target of changes to reinforce worldwide capital and liquidity rules
is building an establishment for sustainable monetary development with a solid
and resilient keeping money framework.
In addition, Basel Committee emphasized that the main objective of
reforms to strengthen global capital and liquidity rules are building a
foundation for the sustainable economy with the strong and resilient banking
system.( BCBS, 2011) The losses caused by spillovers from negative stuns in
money supply which prevents the real economic growth should be counteracted. In
this specific situation, impressive research has inspected the impacts of money
related stuns on genuine monetary movement and procyclical features of risks
based capital proportions, which can father exacerbate budget shocks by forcing
banks to diminish credit supply when such supply is generally required.