It is not so much that the top management of banks consciously swing for the fences, but rather that wholesale credit may be systematically too cheap for banks, and perhaps other intermediaries too, unless the usual market disciplines of failure can apply. The international community is, rightly, increasingly focused on this. And, in particular, it is good news that the G20 Finance Ministers and Governors have asked the Financial Stability Board to pursue it. To quote the theme of this conference, “TBTF” is probably the definitive Cross-Roads issue. Central bank liquidity insurance: discount window lending against wide collateral I shall begin with the central banker’s role as lender of last resort, the one area where there was quite a lot of thinking ahead of this current crisis. Even so, one of the things many central banks, including the Bank of England, confronted over the past two years or so was that, when conditions are bad enough, the central bank will inevitably lend to solvent and viable firms against a very wide range of collateral. Since we will end up doing so, it is wise to acknowledge that in advance. But, crucially, it is also wise to set the terms so as to avoid subsidising or encouraging imprudent liquidity management by firms in normal circumstances. That is one of the principles which underpin the Bank of England’s own new, permanent liquidity facilities introduced just over a year ago. The other principles are that: •  Our liquidity insurance should absolutely not cut across monetary policy.
It is thus no exaggeration to say that those present at a similar dinner six years ago felt quite optimistic about the prospects for the European economy, within Monetary Union, although the Union had only just taken its very first steps and euro banknotes and coins had not even begun to circulate. We now have the benefit of the experience built up in the intervening period. The euro has meant tangible benefits in terms of savings on transaction costs for citizens, eliminating exchange rate risks within the area, facilitating market integration and it has provided an environment of economic and monetary stability. The ECB has attained high credibility in a short period of time which is undoubtedly a result of the clarity of its objectives, the effectiveness of its strategy and the soundness of its decisions. Nevertheless, it is a fact that the European economy has not managed to repeat growth figures close to those seen in 2000. It has been prone to bouts of notable sluggishness, highlighting - in addition to the effect of an unusual series of adverse shocks - the structural shortcomings holding back activity and employment. We have therefore seen that, despite the favourable effects a monetary policy unequivocally geared to price stability has on economic prosperity, the full effectiveness of its contribution requires an ambitious reform agenda in other economic policy spheres.