Without formal supranational solutions in place, it is all the more important to ensure cooperation between the central banks and supervisory authorities involved. The fact that a large share of the financial institutions in the new EU member countries are foreign-owned makes this issue even more relevant. In June 2003, the governors of the Nordic central banks signed an agreement on the management of a potential financial crisis in a Nordic bank with activities in two or more Nordic countries. The agreement contains procedures for the coordination of crisis management between the central banks. The Nordic supervisory authorities have drawn up a similar cooperation agreement. One particular problem in the Nordic region is the differences in the countries’ deposit guarantee schemes. The different schemes vary both with respect to guaranteed amount and type of deposit covered. However, these differences are also widespread across Europe and some convergence of rules and operating procedures is certainly long overdue. What instruments are available to secure financial stability? Monitoring and analysis of the financial system result in an assessment of the current situation regarding financial stability. This leads to the question: what instruments are available to enforce and secure financial stability? We can distinguish between preventive measures and measures for crisis resolution. Of relevance to the latter is the role of the central bank as the lender of last resort. In some countries this role was the main reason for establishing the central bank in the first place.

Clear and concise communication, verbally or in writing, from the authorities to the public on risk factors they consider to be the most pressing could also be used as an instrument in the event of  6  For further discussion, see Houben, Aerdt, Jan Kakes and Garry Schinasi (2004). “Toward a Framework for Safeguarding Financial Stability” IMF Working Paper, No. 04/101  4  BIS Review 34//2005  rising financial imbalances. For central banks, a suitable arena could be financial stability reports, an increasingly common publication. These reports can be described as a signalling device. However, there are limits to how effective signalling and information can be in curbing financial imbalances. Fiscal policy also contributes to financial stability, for example through a stable tax system built on well-founded economic principles. Some have argued in favour of counter-cyclical changes in the tax system, for example adjustments in tax deduction on interest rate expenses or property tax. However, such changes can prove to be difficult to adopt and implement for institutional and political reasons. Financial stability and monetary policy In recent years, the relationship between monetary policy and financial stability has received increased attention. Monetary and financial stability are two intermediate goals for public policy. In my view, these goals are often mutually reinforcing. Financial stability has a positive influence on price stability. First, it promotes a stable credit supply and capital flow, which is crucial to balanced economic development. Second, financial stability supports the transmission mechanisms of monetary policy.