As central banks, we need to consider carefully to what extent instant transparency with regard to liquidity operations may end up being counterproductive. Let me add here that this is a very complex issue. I am not arguing that the evolution towards greater transparency in central banking should be reversed. Indeed, perhaps we need greater ex ante transparency such as clearly stated conditions and eligibility criteria associated with central bank liquidity provisions. Undoubtedly, ex post transparency about potential liquidity support measures must also be guaranteed. But in the midst of a crisis, it may well be beneficial and desirable for central banks to have some flexibility with regard to how they communicate regarding potential liquidity operations. 2.2. Implications of volatile risk premia for the conduct of monetary policy  My second tentative lesson directly relates to the conduct of monetary policy. The recent market strains are unusual because confidence or rather the lack of confidence plays such an important role. Clearly, there is a great deal of uncertainty regarding valuations of complex credit instruments. Moreover and arguably more importantly, banks realize that they are facing or could face large contingent liabilities. They are therefore doing everything they can to protect their balance sheets. In essence, banks are hoarding liquidity and are reluctant to lend money in the interbank market beyond the very short term. As a result, a substantial and highly unusual risk premium has emerged in the interbank market.
In many ways, the situation is deteriorating. As we meet, it is unclear when and how we will be able to return to calmer financial waters. Today I want to begin by discussing why central banks care about financial stability. In a second part, I will try to draw some preliminary lessons for central banks from the current market dislocation. As I said at the outset, the credit crisis is unfortunately still unfolding and its future course is uncertain. Naturally, therefore, we face a lot of questions to which there  1  See for example P. Hartmann, S. Straetmans and C.G. de Vries, 2006, “Banking system stability: A crossAtlantic perspective,” in M. Carey and R.M. Stulz (eds), The Risks of Financial Institutions, The University of Chicago Press, Chicago. BIS Review 141/2007  1  are no clear answers. For the purpose of today’s discussion, I will confine my remarks to the following two issues: The first one addresses the question of the optimal degree of transparency with regard to central bank liquidity operations; the second one investigates the implications of unusually high risk premia in short-term interest rates for the conduct of monetary policy. 1. Why do we care about financial stability? Why does a central bank like the Swiss National Bank care about financial stability? After all, as is the case in a number of other countries, the Swiss central bank does not have a legal mandate to supervise and regulate banks.