The important aspect of developing this work is in providing a common vocabulary in which policymakers can discuss the possible impact of a problem. This may also help to provide a framework for deciding whether to intervene in a crisis, as well as helping to understand who may be interested in intervening. BIS Review 112/2006  3  And fourth: the types of measures we have available in a crisis. I outlined earlier a number of challenges in resolving a crisis involving a large complex financial institution, and the obstacles we may face in addressing them. The Contact Group 2002 report on legal underpinnings 4 provided more detail on the extent to which different legal regimes created vulnerabilities in managing crises. Through discussion of hypothetical problems for real firms we may get closer to understanding more concretely what these obstacles will look like in practice and therefore what we might want to put in place to mitigate them. Put another way, it is potentially a way to develop practical solutions, or at least a practical understanding of the specific issues we might face, within the parameters of our current legal and fiscal set up. What we learn from firm-focussed interest groups should also put us in a better position to tackle some of the thorny issues we face.
And there have been a number of exercises and co-ordination initiatives in different regional groups (for example amongst the Nordic countries, Dutch and Belgian authorities, and more widely across the EU). But there has been less progress on the wider international front. Overall, I do not know anyone who believes that we have established either the common approach to crises or the practical machinery which would enable us to handle a complex cross-border failure with confidence. I would like to make some suggestions tonight on how we might take matters forward. When and how should the State intervene to prevent or manage a financial crisis? Of course the underlying questions are very difficult even for one country. Financial markets are often volatile and they can only work well if investors and firms expect to live or die by their own decisions and do not come to rely on a safety net to mitigate their losses. To avoid that ‘moral hazard’, authorities have tended to be reluctant to spell out in what circumstances and what ways they would  1  Gerard Caprio and Daniela Klingebiel, 2003. “Episodes of Systemic and Borderline Financial Crises”, World Bank Research Dataset. http://econ.worldbank.org  2  http://www.fsforum.org/home/home.html  BIS Review 112/2006  1  be willing to help support a market or a participant, beyond making clear that it would only be in exceptional circumstances and where it was essential in the wider systemic interest.