And if that confidence cracks, the costs are felt not just by the customers and shareholders of the banks concerned, but more widely in the economy given the potential disruption to the payments system. Our monetary economy relies on stability in the banking system. The other side of the Contract has, accordingly, had three elements designed to protect the economy from those risks. First, prudential regulation of banks, to contain their risk taking and so reduce the likelihood of confidence cracking. Second, deposit insurance, to make retail depositors more or less whole in the event of failure notwithstanding that regulation. And thirdly, central bank liquidity policy. Essentially, central banks have stood ready to provide unlimited amounts of liquidity against good collateral at a rate above the market rate prevailing during peacetime. 1 2 During the recent turmoil, that last part of the Contract broke down because borrowing from the central bank via premium-rate facilities became stigmatised. 1  In Lombard Street (1873), Bagehot talks about high rates of interest rather than penalty rates as such. This is in part because he was writing in the context of the gold standard regime, in which systemic stress was often associated with an external flight of credit and so rising short-term interest rates (see pages 56 and 57); in part because Bagehot thought about the premium in terms of comparisons with normal conditions (page 197). 2  This is to be distinguished from support operations for individual institutions.
So it is clearly in our own interests as well as theirs that the Asian economies recover as rapidly as possible and that we help them towards that end. That represents a difficult international economic and financial agenda for the future which, given the time, is perhaps the subject for another lunchtime occasion. The immediate first step is financial stabilisation in Asia, and my message to you today is that we are making progress towards that end. BIS Review 5/1998