WASHINGTON — Good bank supervision is the best wait to limit risks to the financial system, but monetary policy can be used to promote stability in rare instances, Federal Reserve Gov. Jeremy Stein said Wednesday.

"If we were to see signs that banks' capital ratios were in danger of eroding, we would certainly want to do something, but it's hard for me to imagine that the something should involve monetary policy," Stein said in a speech at the International Research Forum on Monetary Policy in Washington. "The obvious first line of defense in this case would be to turn to our regulatory and supervisory tools."

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