In particular, it is essential from Malta’s point of view that the presence of subsidiaries of cross-border banks that are systemically important to a host country be given due weight in determining participation in the college of supervisors. International experience has also shown that state intervention may be necessary to resolve problems in the financial sector. The state is often the only entity in a democracy that has the political legitimacy, financial strength and credibility to support ailing institutions and, hence, restore confidence in the financial system as a whole. In extreme situations, which require the injection of public funds, the cost to the public purse can be very high. This is an additional reason why maintaining fiscal discipline in the shape of balanced budgets over the economic cycle is important. This would allow a buffer to be built up that could be used in exceptional situations if required, without jeopardising the sustainability of public finances. Finally, safeguarding the health of the financial sector in these challenging times also calls for prudent behaviour on the part of the market players themselves. Though not under any identifiable threat, Maltese banks should build on their existing strengths by reinforcing their capital base through the retention of a greater proportion of earnings; and, as domestic economic conditions are expected to weaken, loan loss provisioning levels may also need to rise. BIS Review 155/2008  5  The current crisis will not be over until confidence and trust are restored, and the credit channel starts to function fluidly again.
Even if we supplied the correct aggregate quantity of reserve balances, individual depository institutions with a deficiency of reserves had to find and trade with depository institutions with reserve surpluses. A purchase of fed funds therefore represented the marginal source of funding for a bank, and the fed funds rate paid by the bank was the marginal cost of bank funding. The Desk’s daily fine-tuning operations represented a marginal adjustment to the aggregate supply of reserves, mostly in response to the exogenous impact of changes in other balance sheet items, such as Federal Reserve notes and the level of the U.S. Treasury’s account balance at the Fed, which altered the level of aggregate reserves in the banking system. In the five years prior to the crisis, this system functioned with an average of $ billion in reserve balances and about $ billion in excess reserves. Although aspects of this approach evolved over time, this general method for implementing monetary policy was employed by the Desk for decades, and the Desk’s ability to reliably achieve the FOMC’s policy directive was judged quite favorably by market participants. In fact, with increased transparency around the FOMC’s fed funds target (which the Committee began to officially announce in the mid-1990s) and with high confidence in the Desk’s ability to hit that target, markets often adjusted to announced changes in the FOMC’s target policy rate without the need for the Desk to conduct operations to effect the change.