From a micro analysis point of view that was reflected on unsustainable financial position of enterprises and households balance sheets, lead by persistent fighting for market share in products and services in the banking system. It is for that reason that hard gained achievements attained during the last 15 years in eastern Europe, got reversed within one week. Today, one year after the eruption of the financial crisis, I have to affirm that all the measures undertaken by central banks of countries in the region resemble one another. Generally speaking, in my opinion the measures adopted during this period are of an extreme nature; they are unusual and go against the “constitution” of the modern central bank with regard to liquidity, money market and monetary policy transmission channels. However, we have embraced the philosophy that “the end justifies the means”. Nevertheless, I think the central bank has become more vulnerable in terms of independence and monetary policy efficiency. Providing liquidity in any case, in any quantity, with any maturity and accepting any kind of collateral would definitely damage the monetary policy, with potential second round effects on financial stability. If central banks in the short run shift their focus from the primary objective to supporting economic growth at any cost, it would indirectly create premises for long rung economic imbalances. The current polices pursued by both monetary and fiscal authorities should not be considered as a new normality.
But one of the roles of, and indeed justifications for, regulation is to ensure that firms also take sufficient account of the interests of others who would be adversely affected by their failure: their own borrowers and depositors, for example, but also the customers of other banks that would suffer losses if a particular bank were to get into difficulties. In other words, one purpose of regulation is to align private choices with public welfare maximisation. Hitherto, public authorities have placed much emphasis on capital requirements as a way of achieving this reconciliation. Indeed, one reason for imposing capital requirements is to limit the risk of liquidity problems, by giving the market a level of assurance over the solvency of a firm. But this emphasis on capital has perhaps overshadowed the importance of direct liquidity requirements. Analytically, liquidity is a more difficult area. But arguably the case for prudential liquidity requirements in some form is just as strong as for capital. Liquidity cushions are a first line of defence: in times of stress they can buy time, and where organisations are solvent they can help to prevent liquidity problems turning into solvency ones. I will return to this later. But besides regulation, the public authorities—specifically central banks—have a crucial role as the ultimate providers of liquidity. They therefore need to ensure that they are properly equipped to carry out this function.