First, a greater degree of self-insurance by banks to lower the probability of central bank resources needing to be drawn. In practice, this means that liquidity regulation needs to be tightened, reversing the secular fall in liquidity ratios (Chart 3). In the language of insurance, the excess on the central bank policy needs to be raised materially. The FSA’s proposed new liquidity regulation provides a good starting point. 21 Second, central bank liquidity insurance frameworks need explicitly to recognise the possibility of drastic times requiring drastic measures. The key is to prevent such drastic action becoming disorderly on the one hand, and permanent on the other. The first can be achieved by having a pre-defined framework which recognises the need for abnormal liquidity provision, whether in size, collateral quality or term. The second can be achieved by setting prices (fees and collateral haircuts) for liquidity provision which discourage abnormalities from becoming regularities. The Bank of England’s new sterling monetary framework, announced last October, seeks to apply those principles in practice. 22  •  Time-consistent deposit insurance: Deposit insurance schemes have been stretched in many countries, to the point of offering blanket coverage of retail deposits. Those actions are already damping the risk senses of depositors, who have rationally reacted by seeking out the highest-yielding accounts. This has contributed to a competitive frenzy in the retail deposit market. In the UK, retail deposit rates have risen over the past year from 100 basis points below base rate to 100 basis points above.
European Central Bank: Press conference – introductory statement Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank and Mr Lucas Papademos, Vice-President of the European Central Bank, Athens, 8 May 2008. *  *  *  Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to today’s press conference here in Athens. I would like to thank Governor Garganas for his kind hospitality and to express our special gratitude to his staff for the excellent organisation of the meeting of the Governing Council. Let me report on the outcome of our meeting, which was also attended by Commissioner Almunia. On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. Inflation rates have risen significantly since the autumn, owing mainly to increases in energy and food prices. As we have said on previous occasions, inflation rates are expected to remain high for a rather protracted period of time, before gradually declining again. The latest information confirms our assessment that upside risks to price stability prevail over the medium term, in a context of continuing very vigorous money and credit growth. At the same time, the economic fundamentals of the euro area are sound, and incoming macroeconomic data continue to point to moderate but ongoing real GDP growth. However, the level of uncertainty resulting from the turmoil in financial markets remains unusually high and tensions still persist.