But the pricing of liquidity risk was either non-existent or inadequate in fully incorporating the maturity and currency mismatch, contingent and market liquidity risks embedded in the various banking business lines. 36. But liquidity is not only a matter of individual firm’s supervision; it is also of huge importance for the functioning of a whole system, which mainly relies on the liquidity management of a few firms. It is because of inaccurate liquidity risk pricing methodologies that large financial firms have built critical cash flow mismatches, and held substantial holdings of illiquid instruments with overestimated profitability profiles, based on unsustainable leverage strategy. 37. The Basel Committee’s renewed attention to liquidity issues is very topical. A major innovation of the proposed reform package deals with liquidity. In principle, no one will challenge the need to implement liquidity regulation for banks. Indeed, the new regulation will be calibrated and designed to help raise banks’ awareness of the cost of liquidity. Conclusion 38. In the past, financial crises have always triggered important changes in the organization and practice of Central Banking. The latest one is for me not an exception. Central banks have managed to adjust and confront several new, unprecedented challenges rather effectively and, it should be noted, with unprecedented degree of coordination and cooperation. 39. In many countries, the need to develop stronger macro-prudential policies has resulted in new assignments. As for my home county, I can say that having both monetary policy and financial stability responsibilities under the same roof has proved rather useful. 40.

They are also likely to rely on importing price stability from abroad during the interim period. Larger countries that have invested heavily in developing a credible independent monetary policy but still have more to do in the area of fiscal policy reforms and flexibility of domestic economies, will probably opt for a more cautious approach. They are likely to prefer avoiding double regime switches, opting instead for a smooth and fast transition from the current regime to euro adoption. The Czech Republic belongs to the latter group. The Czech strategy for euro adoption is based on a cautious timescale. In the pre-EMU period, we want to ensure low inflation domestically, not by importing it. In the strategy, we have pointed to the years 2009-10 as the most likely entry date. In comparison to other new EU member states, this timescale had been viewed as relatively cautious. However, it should be said that other countries in the region have recently pushed back their initially more optimistic estimates. The primary reasons for this more cautious timescale are - in all cases fiscal developments. In the pre-EMU period, we will continue targeting inflation. This strategy has gained a substantial degree of credibility in the Czech Republic since its introduction in 1997. Our inflation target for the period beyond January 2006 is set at 3% (for CPI), which should allow us to fulfil the monetary side of Maastricht convergence criteria, and at the same time to reflect the long-term real convergence needs of the Czech economy.