Европейская денежная система

market-based solution is possible, on the grounds of private interest, private parties may not be able to reach a solution for lack of information or co-ordination. Public authorities have therefore an active role to play for the market solution to materialise. The recent rescue package co-ordinated by the Federal Reserve Bank of New York to prevent the LTCM hedge fund from collapsing is a good example of public intervention being used to achieve a private solution.

Acting as a "midwife" in brokering a private sector deal is not the only example of managing crises without injecting public funds. Banking supervisors have at their disposal a number of tools to intervene at the national level to limit losses and prevent insolvency when a bank faces difficulties. These tools include special audits, business restrictions and various reorganisation measures.

In the euro area, national supervisors and central banks will continue to be the key actors in the pursuit of market-based solutions to crises. The Eurosystem, or the Banking Supervision Committee, would become naturally involved whenever the relevance of the crisis required it.

24. Second, the "taxpayers' money solution". Taxpayers have been forced to shoulder banks' losses in the past, when public authorities felt that otherwise the failure of a large portion of a country's banking system or of a single significant institution would have disrupted financial stability and caused negative macroeconomic consequences. In such instances banks have been taken over by the state, or their bad assets have been transferred to a separate public entity to attract new private investment in the sound part of the otherwise failed banks. The US savings & loans crisis of the 1980s, the banking crises in Scandinavia in the early 1990s and the current banking crises in Japan and some East-Asian countries are examples of system-wide insolvency problems that have triggered taxpayers' support. Crйdit Lyonnais and Banco di Napoli are recent examples of public support to individual insolvency problems.

The introduction of the euro leaves crisis management actions involving taxpayers' money practically unaffected. The option of injecting equity or other funds remains available for the Member States, since these operations are not forbidden by the Treaty. Nevertheless, the European Commission will be directly involved in scrutinising and authorising such actions, since any state aid must be compatible with the Community's competition legislation. This happened, for example, in the cases of Banco di Napoli and Crйdit Lyonnais.

The handling of solvency crises is not within the competence of the national central banks nor that of the ECB, although national central banks are likely to be consulted, as they have been in the past.

25. Third, the "central bank money solution". This is the lender-of-last-resort issue that has brought the Eurosystem under vigorous criticism by distinguished academics and the IMF's Capital Markets Division of the Research Department. The criticism has been that the alleged absence of a clear and transparent mechanism to act in an emergency raises doubts in the markets about the ability of the Eurosystem to handle crisis situations. It is said that the uncertainty generated by the present arrangements would entail new risks, including the possibility of investors requiring an additional risk premium at times of financial market volatility and, ultimately, of the credibility of EMU being damaged. Two examples of these concerns deserve an explicit mention. The IMF "Report on Capital Markets", September 1998, stated that "it is unclear how a bank crisis would be handled under the current institutional framework …which is not likely to be sustainable". Similarly, the first report of the CEPR (Centre for Economic Policy Research) on monitoring the ECB entitled "The ECB: Safe at Any Speed?" expressly suggested that the Eurosystem lacks crisis management capacity and is too rigid to pass the A-Class test to keep the vehicle on the road at the first steep turn in financial market conditions in Europe.

26. My response to this criticism is threefold. To my mind, the criticism reflects a notion of lender-of-last-resort operations that is largely outdated; it underestimates the Eurosystem's capacity to act; and, finally, it represents too mechanistic a view of how a crisis is, and should be, managed in practice.

27. The notion of a central bank's lender-of-last-resort function dates back more than 120 years, to the time of Bagehot. This notion refers to emergency lending to institutions that, although solvent, suffer a rapid liquidity outflow due to a sudden collapse in depositors' confidence, i.e. a classic bank run. A bank could be exposed to depositors' panic even if solvent because of the limited amount of bank liquidity and an information asymmetry between the depositors and the bank concerning the quality of bank's assets that do not have a secondary market value.

Nowadays and in our industrial economies, runs may occur mainly in textbooks. They have little relevance in reality because, since Bagehot, many antidotes have been adopted: deposit insurance, the regulation of capital adequacy and large exposures, improved licensing and supervisory standards all contribute to the preservation of depositors' confidence and minimise the threat of a contagion from insolvent to solvent institutions.

A less unlikely case is a rapid outflow of uninsured interbank liabilities. However, since interbank counterparties are much better informed than depositors, this event would typically require the market to have a strong suspicion that the bank is actually insolvent. If such a suspicion were to be unfounded and not generalised, the width and depth of today's interbank market is such that other institutions would probably replace (possibly with the encouragement of the public authorities as described above) those which withdraw their funds. It should be noted, in this respect, that the emergence of the single euro money market lowers banks' liquidity risk, because the number of possible sources of funds is now considerably larger than in the past.

Given all of these contingencies, the probability that a modern bank is solvent, but illiquid, and at the same time lacks sufficient collateral to obtain regular central bank funding, is, in my view, quite small. The textbook case for emergency liquidity assistance to individual solvent institutions has, as a matter of fact, been a most rare event in industrial countries over the past decades.

28. What if this rare event were nevertheless to occur and cause a systemic threat? The clear answer is that the euro area authorities would have the necessary capacity to act. This is not only my judgement, but also that of the Eurosystem, whose decision-making bodies have, as you can imagine, carefully discussed the matter. I am not saying that we are, or shall be, infallible; no one can claim such a divine quality. I am saying that there are neither legal-cum-institutional, nor organisational, nor intellectual impediments to acting when needed. In stating this, I am aware that central banks may be the only source of immediate and adequate funds when a crisis requires swift action, while solvency remains an issue and failure to act could threaten the stability of the financial system.

In these circumstances the various national arrangements would continue to apply, including those concerning the access of central banks to supervisors' confidential information. As is well known, such arrangements differ somewhat from country to country.

29. The criticism I have referred to also underestimates the Eurosystem's capacity to act. To the extent that there would be an overall liquidity effect that is relevant for monetary policy or a financial stability implication for the euro area, the Eurosystem itself would be actively involved.

The Eurosystem is, of course, well equipped for its two collective decision-making bodies (the Board and the Council) to take decisions quickly whenever needed, whether for financial stability or for other reasons. This readiness is needed for a variety of typical central bank decisions, such as the execution of concerted interventions or the handling of payment system problems. Indeed, it has already been put to work during the changeover weekend and in the first few weeks of this year.

A clear reassurance about the capacity to act when really needed should be sufficient for the markets. Indeed, it may even be advisable not to spell out beforehand the procedural and practical details of emergency actions. As Gerry Corrigan once put it, maintaining "constructive ambiguity" in these matters may help to reduce the moral hazard associated with a safety net. I know of no central bank law within which the lender-of-last-resort function is explicitly defined.

The question of who acts within the Eurosystem should also be irrelevant for the markets, given that any supervised institution has an unambiguously identified supervisor and national central bank. As to the access to supervisory information, the lack of direct access by the Eurosystem should not be regarded as a specific flaw of the euro area's institutional framework, as has been frequently argued, since this situation also exists at the national level wherever a central bank does not carry out day-to-day supervision.

30. Finally, the criticism reflects an overly mechanistic view of how a crisis is, and should be, managed in practice. Arguing in favour of fully disclosed, rule-based policies in order to manage crises successfully and, hence, maintain market confidence, is almost self-contradictory. Emergency