9 Figure 1 summarizes the worldwide occurrences of banking problems. All countries that are shaded dark gray have experienced banking crises between 1980 and 1996. 10 The light-gray shaded countries have had significant banking problems. As you can see, there are only a few white spots on the world map. These are often countries which lack a meaningful banking system. Some of these white spots probably shouldn’t be white. For instance, Switzerland experienced a significant banking crisis during the early 1990s. 7  See, for instance, Kose John, Teresa A. John, and Lemma W. Senbet, 1991, ”Risk-Shifting Incentives of Depository Institutions”, Journal of Banking and Finance 15, 895-915. 8  Other examples include the ECB, which has the task of contributing “to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.” (Article 105(5) of the Maastricht Treaty). In the UK, the Bank of England was formally charged with the responsibility for the “overall stability of the financial system as a whole” by the Chancellor in a letter to the Governor on 20 May 1997. 9  See, for instance, Aslı Demirgüç-Kunt, and Enrica Detragiache, 2005, “Cross-Country Empirical Studies of Systemic Bank Distress: A Survey”, World Bank Working Paper No. 3719. 10  Taken from Charles Goodhart, Philipp Hartmann, David Llewellyn, Liliana Rojas-Suárez, and Steven Weisbrod, 1998, Financial Regulation. Why, how and where now? Routledge, London.
BIS Review 141/2007  3  The way in which central banks conduct monetary policy has also had an important impact on the increasing attention central banks give to financial stability. As you know, it has become best practice for central banks to conduct monetary policy with the aim to achieve a more or less clearly defined inflation target. 11 In the process, monetary policy has become closely linked to price stability, defined by a given headline or core inflation measure. To prevent too narrow a focus and to avoid having to ignore relevant developments outside the immediate realm of inflation measured by CPI or core inflation measures, focusing on financial stability potentially constitutes an important additional leg for monetary policy to stand on. Obviously this is a vast and complicated subject. I have no doubt that much research will be devoted to the question of the role of financial stability in formulating monetary policy in the years to come. 12 In the banking industry, the consolidation process of recent years has produced some very large and often highly complex financial institutions with truly global reach. They are often “systemically relevant”. In other words, problems at one of these institutions can potentially have a detrimental impact on the entire financial system which, in turn, could cause great economic dislocation. As a consequence, these institutions are deemed by many to be “too big to fail”. In essence, the market assumes that such institutions would likely be bailed out in the event of a severe crisis.