A competitive factor that has been important for national banks—familiarity with their domestic monetary policy—will disappear when the single currency is introduced. This could lead to a centralisation of trading in treasury bonds. It is quite conceivable that in time, treasury bond transactions are concentrated to one or two financial centres in Europe. The elimination of exchange risk means that risks of other types will attract more attention. I am thinking in particular of liquidity and credit risks. This could well result in the development of trans-national European markets for different categories of bonds, for example, corporate bonds, housing bonds and local authority bonds. A contributory factor here will probably be a propensity for investors to spread risks by diversifying portfolios so that potential losses are limited. Nor is it only trading in these instruments that will be affected. New knowledge will have to be acquired by the various players. Share trading is already showing clear effects of EMU. Stock exchange mergers are occurring here and there in Europe. Another expression of what is at least a related tendency is remote participation in the national stock exchange. At the same time, the two principal competitive factors in share dealing will continue to apply, namely local customer relationships and knowledge of national BIS Review 81/1998  -3accounting, taxes and laws in the company’s home country. But even these factors will be modified as investors learn more about conditions in other countries, harmonisation between countries continues and the production of goods and services is increasingly globalised.

That is why banking operations need to be safeguarded. One safety measure is the possibility, in exceptional circumstances, of the central bank intervening as the lender of last resort. This is a matter of providing liquidity—as long as the banks are fundamentally solvent—when the stability of the entire financial system is threatened. In that way it is BIS Review 81/1998  -4possible to avoid more serious economic consequences and, provided the problems underlying the crisis are managed, stabilise the situation in the banking system and the economy in general. However, a central bank’s unique possibility of providing liquidity is restricted to the national currency. If a country has an external deficit and revenue from exports does not cover imports, to make up the difference it has to borrow in foreign currency. The vulnerability this involves increases if the loans are short-term, sizeable and have been channelled via the banking system to long-term investment projects. If a country in this situation encounters problems with the renewal of foreign loans, the central bank will have limited opportunities of coming to the rescue with liquidity unless it happens to have sufficient foreign exchange reserves or borrowing facilities. That is more or less what has happened in the countries that have recently been hit by problems. Sudden shifts in confidence as to a country’s real economy, the value of its assets or its political system are examples of factors that have triggered crises in economies that have been highly vulnerable.