Only by applying the same definitions worldwide, can the soundness of individual banks be compared internationally. It avoids the possibility of financial institutions engaging in arbitrage through the establishment of complex cross-border legal structures. These international decisions are also far-reaching in their importance because they predetermine the options and limitations faced by national regulators. However, implementation at national level is ultimately decisive. In particular, it is the deciding factor as far as financial institutions in any one country are concerned. In this respect, an international minimum standard cannot suffice when it comes to addressing specific national problems. For instance, at the moment, the Basel III package does not address the issue of systemically important banks, which fundamentally concerns Switzerland. Because of this concern, proposals that go beyond Basel III were presented in the report of the committee of experts. Central banks as the lender of last resort for markets? I will now move on to another point, which is directly related to the topic of this conference – liquidity. Since markets are constantly undergoing dynamic processes of adjustment, it is clear that another crisis can never be completely ruled out. Complete security is impossible. 8  The introduction of a leverage ratio is also planned within the Basel III framework. BIS Review 146/2010  5  Consequently, at times, the markets will be unable to provide sufficient liquidity in an efficient manner. In such cases it is essential that central banks are able to step into the breach temporarily as lender of last resort.

In this way confidence in the financial institutions can be restored, and the vicious cycle of liquidity bottlenecks, forced fire sales and bank runs can be ultimately avoided. By providing emergency liquidity assistance, central banks aim primarily to stabilise the precarious liquidity situation faced by solvent institutions. Above and beyond this, the increasing importance of systemic risk has made the emergency liquidity provision to entire markets ever more imperative. Markets can also be faced with liquidity runs. This was only too evident from the high risk premia observed in the interbank market during the recent crisis. It is conceivable that central banks will take on the role of market maker of last resort in such situations in order to secure key market functions. Indeed, in certain situations it is essential. 9 In an acute crisis, the costs and probability of a system collapse can be reduced in this way. However, the assumption of a lender of last resort or market maker of last resort function is not without problems. First, it does not guarantee long-term stabilisation in every case. Second, these crisis measures are no substitute for tackling the root causes or for lack of robustness on the part of financial market participants. In particular, the presence of a market maker of last resort is associated with a variety of incentive problems. 10 It can, for instance, encourage market participants to enter into excessive risk exposure in the expectation that the central bank will step into the breach if necessary.