So, what is it that we need in order to achieve better crisis preparedness? As I just indicated, one important requirement is to have in place solid frameworks for the management and closure of distressed banks. Such frameworks include several different aspects, everything from deposit guarantee schemes to insolvency procedures. Basically, it is a quite technical mix of legal and financial measures which can look rather different from country to country. However, the basic concept applies to all. Frameworks should facilitate the quick and efficient closure of banks at a low cost to the deposit guarantee system, while making shareholders and uninsured creditors bear the responsibility for their investment decisions. It must also allow for special measures to be taken in the exceptional situation where the failure of a bank risks destabilising the financial system as a whole. Also in such situations, the government needs to have a strong negotiating position relative to the shareholders. Necessary ingredients for achieving all this are to allow distressed banks to be put under special receivership and to enable governments to issue guarantees and make capital injections. As a countermeasure the government obviously needs to have farreaching authority to take control of the institution, for example by requiring the compulsory sale of shares. 4  BIS Review 134/2008  With regard to central banks there is also reason to contemplate how crisis preparedness can be improved. For example, we need to consider how appropriate flexibility is achieved in the central banks’ operational frameworks to deal with extraordinary situations.

The existing voluntary agreements for crisis management in the EU have proven not to be extremely helpful. Concrete and binding arrangements are instead needed in order to achieve better preparedness and co-ordinated crisis responses. Luckily, this time policymakers around Europe eventually realised that a coordinated crisis response was a necessity. Partly because of this experience, the EU has initiated work to review how the EU’s supervisory framework can be reformed to better cope with the financial market integration. Exactly what this work will include is still unclear, but it is highly welcome that the issue has been placed on the agenda. However, I would like to add that – because of the close interaction between crisis prevention and management issues – it will not be sufficient to deal only with supervisory issues. Arrangements for deposit guarantee schemes and other crisis management tools need to be considered within the same international context. Of particular interest is the sensitive issue of how to distribute the burdens associated with managing cross-border crises, which will inevitably be brought to the table if proposals for supranational supervision enter the debate. After all, who would like to share crisis management responsibilities without getting any supervisory powers in return? Implications for the central banks’ work on analysing financial stability and systemic risks I will now say a few words about the central banks’ work on analysing financial stability and systemic risks. Given the current conditions one may ask if such analysis is at all meaningful.