In some cases, the extreme private sector solution – winding-down of the troubled institution – would probably be the preferred approach. The Law on Credit Institutions together with the Bankruptcy Act provides central bank and other authorities with all necessary powers for closing down the business and letting trustees to take care of the practical aspects. The Deposit Insurance Fund will immediately reimburse all depositors within legal limits. BIS Review 63/2001  3  Of course, in other situation, different approach must be taken and a strict adherence to the former rule is not feasible. Nevertheless, the initial response would still be the private solution. One option would be the central bank to take the lead as an honest broker and bring together all private and official parties concerned. Ideally, that would result in design of ad hoc private solution in a form of merger, acquisition or emergency support. The role of central bank would effectively be the application of moral suasion, without committing public funds. However, one can and should not wholly dismiss the need for direct public intervention should it become necessary. What will be different in our case is that in case of serious trouble, the dividing line between liquidity support and capital injection would be rather blurred or these operations may even take place simultaneously, after writing down capital of the troubled institution. The need for very close coordination between the central bank, the government and supervisors is characteristic feature of this approach.
V.  Safety nets: crisis resolution  In free market economy, no policy and no supervision can prevent the possibility of financial distress in any particular financial institution. What the public policy can do is to minimize the likelihood of systemic crisis. Crisis resolution is the key to avoid systemic disturbance. As we know, the ultimate policy choice for the authorities is to find the balance between the public sector and private sector solution from the one hand and between the pre-determined schedule and ad hoc approach from the other hand. Estonia's currency board regime sets for Bank of Estonia clear and strict limits that exclude several options available for the authorities in many other countries. By limiting the money supply to net foreign assets of the central bank, the room for emergency liquidity support is very limited. Therefore, in our case, the private sector solution is preferable and particular modalities of crisis resolution will depend very much on the circumstances. At this point, I would like to refer back to previous parts of my speech and underline that this particular approach rests upon a few strong fundamentals. Continuous analysis of financial system developments and early warning indicators, importance of strong owners and sound risk management in banks, high liquidity and capital requirements – these basic principles are a necessity for us. By combining the principles just mentioned, we can now describe a few hypothetical crisis resolution situations in Estonian financial system.