More precisely, the Eurosystem’s operational framework is characterised, first, by a large number of counterparties eligible for refinancing operations and marginal lending facility. This facilitates the direct provision of liquidity to a large number of banks in need of it, at a time when the money market is working imperfectly. Second, the Eurosystem accepts a wide range of collateral eligible for its refinancing operations. This has facilitated the raising of liquidity via the Eurosystem for banks with reduced access to the interbank market, at the same time economising through their operations with the Eurosystem on those few types of assets that have continued to be tradable throughout the turbulence, such as government bonds. In this respect, the framework may have also supported the continued functioning of capital markets. Third, the large size of its refinancing operations (around one third of total assets in the Eurosystem balance sheet – or € billion) has allowed the Eurosystem to provide longer term refinancing to banks at a large scale, and at the same time to continue to adequately steer liquidity in the course of the maintenance period. BIS Review 123/2008  3  2. Implications for central banks, financial regulators and supervisors  At the level of the international community, we have adopted a methodology for responding to the present turmoil and working out what lessons can be drawn from the crisis: the FSF, created after the Asian crisis, coordinates global efforts towards creating a more resilient financial system.
Indeed, all financial sectors are impacted by market developments as the boundaries between financial activities are becoming increasingly blurred. More broadly, all competent financial authorities, central banks, supervisors and ministries of finance should strengthen their coordination mechanisms for managing a crisis impacting cross-border financial institutions. In Europe, an important step has been taken in this direction with the Memorandum of Understanding signed by the financial authorities of all EU Member States in June 2008, which established common principles, procedures and terminology to be used by all parties involved in a cross-border crisis. BIS Review 123/2008  5  Conclusion We are experiencing a very challenging and demanding episode of the market correction which started more than a year ago and was due to a significant underassessment and underpricing of risks in global finance. This fostered extremely high risk–taking behaviour, excessive leverage and a widespread use of toxic, obscure and abnormally sophisticated financial instruments. In this regard, global finance was potentially unstable before the start of the turbulence and this was mentioned publicly, particularly in 2006 and the first part of 2007, by a number of speakers, including myself. The sub-prime mortgage crisis has therefore played the role of a trigger but there was a good deal of explosive around. My experience of previous crises is that it is extremely important to analyse situations very carefully and lucidly and never to underestimate its gravity.