A problem that is potentially relevant in systemic terms is the availability of intraday liquidity in foreign currencies, which is typically restricted, if not non-existent. This restriction hampers liquidity management in an integrated multi-currency environment. Nowadays, there is a much more urgent need for market participants to make time-critical payments than previously. Moreover, they must be 5  The Committee of Wise Men (2001): Final Report of the Committee of the Wise Men on the Regulation of European Securities Markets, Brussels. 6  A. Lamfalussy (2001): “Reflections on the Regulation of European Securities Markets”, Société Universitaire Européenne de Recherches Financières, SUERF Study N° 14, Vienna. 7  A. Crockett (2002): Introductory speech at the Third Joint Central Bank Research Conference on Risk Measurement and Systemic Risk, Basel. BIS Review 37/2002  5  able to react simultaneously in several currencies even in troubled circumstances. Their liquidity management could be facilitated and strengthened significantly if they were able to obtain short-term liquidity in the required currency through a cross-border collateral pool. Such a collateral pool would boost the ability of the large market participants to react, thereby reducing the system’s vulnerability to disturbances. In addition, this would result in efficiency gains, as maintaining a pooled collateral portfolio would certainly be less costly than keeping several currency-specific portfolios. In view of the manifold legal and technical obstacles, one is tempted to deem such a collateral pool a vision.

Most of the time, they are driven by rapid inflows and outflows of capital. We still vividly remember the crises in Mexico, Asia, Russia and Argentina. Obviously, these crises have not been restricted to the financial sector, but have had a profound impact on the real economy as well. The lifting of restrictions to cross-border holding and trading of financial assets has unleashed massive capital flows. According to World Bank figures, global debt and equity flows (excluding foreign direct 2 investment) expanded by more than five times since 1991, from USD 794 billion to USD 4.3 trillion . Without doubt, this development reflects a long-term trend. More and more investors decide globally and on the basis of risk-adjusted expected returns. Taking place in a system of increasingly integrated capital markets, capital allocation has become more efficient. The other side of the coin, however, is the increased volatility on financial markets. Indeed, portfolio investments, in particular those in markets with relatively high liquidity, have become more erratic, as fund injections and withdrawals respond very quickly to new information. According to the IMF, assets managed by institutional investors on mature markets are estimated at about USD 30 trillion in 1998. Thus, any shift in such a huge portfolio is very likely to exacerbate economic cycles and will possibly lead to contagion among financial markets. The impact of portfolio re-balancing will be all the more powerful as macroeconomic policies seem to be unsustainable and as financial institutions show fundamental weaknesses, often with regard to financial strength, supervision and transparency.