Financial crises are episodes with high volatility in the financial markets, liquidity problems and insolvency of significant financial market participants that give rise to real economic adverse effects.
Financial institutions form the first line of defence against financial crises. Credit institutions have a responsibility to remain viable and solvent, to properly assess the creditworthiness of borrowers and to effectively manage the risks they assume.
The measures taken by public authorities to prevent or minimise financial crises constitute the second line of defence. Public authorities are responsible for developing the necessary institutional, supervisory and regulatory framework for the proper functioning of the financial system. This framework should include, inter alia, effective microprudential supervision of individual financial institutions as well as macroprudential supervision of the financial system as a whole.
If, despite all these prudential measures, financial institutions run into trouble, public authorities may need to intervene by taking appropriate crisis management and resolution measures.