Banking sector problems experienced in the early part of the 1990s clearly highlighted the central bank's need to take prompt action in the face of a financial crisis. In its activities, the Bank of Finland prepares for potential crises in financial and payment systems. As part of its crisis preparation, the Bank of Finland develops its readiness to act in situations where problems of one or more monetary financial institutions or market segments threaten to jeopardise financial stability. In addition, the Bank of Finland tests back-up arrangements of payment systems.
In the last few years, a number of banks have expanded their operations across national borders. It is therefore indispensable that, in the event of a financial crisis, the central banks of various countries be prepared to cooperate in order to tackle a potential crisis situation and take the action deemed necessary.
Preparation for crises means agreement in advance on requisite measures and cooperation between various authorities and countries. Such agreements are normally documented in the form of Memoranda of Understanding (MoU).
EU banking supervisors, central banks and ministries of finance signed a Memorandum of Understanding in 2005 aimed at supporting and promoting cooperation in potential crisis situations. The Memorandum is based on current EU legislation and other agreements. The new Memorandum has been effective since early July 2005.
The governors of the Nordic central banks signed a Memorandum of Understanding on financial crisis management as early as 2003. The MoU is applicable when a crisis threatens any bank which is domiciled in a Nordic country and has at least one cross-border establishment in the area.
Hypothetical crisis management exercises are conducted as a means to develop practical capabilities for crisis management. Such ‘mock training’ often takes place between the competent authorities of various countries. The Bank of Finland also participates in national crisis management exercises, together with other financial sector authorities and market participants.