We absolutely must keep a clear line around central banking. 26 Which brings me to the third “instrument” I want to say something about today. Capital of Last Resort However much the authorities do to forestall or alleviate a crisis by providing liquidity, I fear that we cannot rule out that very rarely the banking system will end up needing to be supported by some ultimate source of capital. We absolutely must be prepared to let banks fail when, in systemic terms, it is safe to do so. Such decisions call for technocratic judgment. But, as we have seen, sometimes disorderly bank insolvencies would bring systemic distress. For that reason, at least three things follow. First, each country needs a Special Resolution Regime for distressed banks, and probably more widely; we cannot rely on general insolvency law to help control threats to system stability. Thank goodness, the UK now has such a regime for banks, and the Bank will draw lessons about whether it needs refinement over time. Second, given the prevalence of internationally active banks in a globalised economy, national authorities just must be able to work together – in reality; when it matters – to control the resolution of banks whose activities cross borders. 27 And third, as by now  26  This was re-affimed recently in a joint statement by the US Federal Reserve and the Department of the Treasury (www.federalreserve.gov/newsevents/press/monetary/20090323b.htm).
Let me just highlight two of them: First, since investment funds are large institutional investors, their portfolio choices may be indicative of more general trends in portfolio diversification. For that reason, these statistics are certainly also useful for explaining monetary developments. Second, changes in investment funds’ asset value are transmitted, through the valuation of their shares, to households and firms. In turn, these wealth effects, may have implications on aggregate demand. The structure of the financial assets held by investment funds also provides important information regarding the financial risks that are indirectly borne by households and firms through their portfolio of investment fund shares. BIS Review 165/2009  1  In addition to the new statistics on investment funds, separate data are now also published every quarter on euro area Money Market Fund balance sheets. As a consequence, one can now perform analyses for the whole sector of funds. These new data on Money Market Funds are also a useful addition to the ECB’s monetary analysis. Because of the close substitutability between their shares issued and bank deposits, money market funds form part of the Monetary Financial Institutions sector and are thereby contained in the M3 figures. From now on, the new investment fund and money market fund data will be published in regular monthly ECB statistical press releases. I am convinced that the new harmonised statistics yield novel insights into the structure and development of the financial sector of the euro area economy.