Central banks must cut interest rates to prevent financial instability.
The interbank lending market is important for banks during uncertain times. When banks have different levels of liquidity, the central bank should lower the interbank rate. This means that prudential regulation and monetary policy should be more connected. During a crisis, central banks should manage the amount of money available. Interest rates and injecting money are both needed to deal with different types of crises. Not cutting interest rates during a crisis can make things worse by increasing the risk of bank runs.