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.
Mr. George looks at the question as to whether banks are still special Speech given by the Governor of the Bank of England, Mr. E.A.J. George, at the IMF 7th Central Banking Seminar entitled Banking Soundness and Monetary Policy in a World of Capital Markets and held in Washington on 29/1/97. Mr. Chairman, I am delighted to take part in this well-directed and well-timed seminar. I am particularly pleased to be able to share with you my thoughts on the question you put to me “Are banks still special?” That question is partly a matter of institutional fact; but beyond that lies the question of whether the institutional characteristics of banks still justify central banks’ special concern for the stability of the banking system reflected in both macroand micro-prudential oversight and in their role as lender of last resort. So the answers to those questions could have far-reaching implications for the role of central banks themselves. In offering my answers I will ask, first, why banks have been regarded as special? Then I will ask whether banks have changed, or whether other financial institutions have become more bank-like? I will save my conclusions until the end! I am conscious, in this international forum, that I speak from a British perspective - in terms of the institutional and legal contexts and their evolution in relation to banks. But I would hope that, while some of the detail may be specific to the UK, the broad substance will not be.