day liquidity management impaired signalling of the monetary policy stance. • the situation is more problematic on longer money market maturities, where a substantial premium on official rates has emerged. central bank interventions have been effective in avoiding market disruptions, but they could not address the lack of disclosure underlying these tensions, resolution of which requires additional information of the size and distribution of exposures, an assessment of the impact on banks ’ balance sheets, and the completion of the process of risk repricing. all in all, by their prompt interventions the central banks were able to preserve orderly market conditions and avert a liquidity crisis, without endangering the markets ’ medium - term expectations in a period of volatility and generalized uncertainty. 4. 2. strengthening the foundations of the financial system the ongoing financial turbulence has not come as a surprise. for some time the supervisory authorities had been emphasizing the increasing strains, stressing the rise in sub - prime mortgage defaults in the united states and warning that investors ’ perception of risk might have changed suddenly, leading to abrupt portfolio adjustment and destabilizing effects. but the interaction between the difficulty to value sf products, the evaporation of liquidity and the “ rush to exit ” to reduce risk exposure could not have been foreseen, and nor could the speed at which the crisis spread across institutions and markets. to tackle the fragilities highlighted by the current turbulence, the financial community has put a number of initiatives in place in recent months. in particular : • at the request of the group of seven, the financial stability forum ( fsf ) is reviewing several important issues such as the management of risks – especially liquidity risk – by the institutions subject to regulation, the appropriateness of capital requirements, the full consolidation of the assets and liabilities currently kept off banks ’ balance sheets, and the transparency and valuation of structured financial products. • the eu finance ministers have asked the economic and financial committee to examine a number of issues raised by the recent turbulence, analysing them in a way that is complementary to the mandate of the fsf by taking a european perspective and covering slightly different areas, including the implications of the new capital requirements directive, which implements the basel 2 framework in the european union. in fact, it was not properly anticipated that commercial banks could be the weak link in the system : other financial institutions, hedge funds first of all, were thought to be more likely candidates to set off a crisis. to some extent, the

mr. fazio considers the issue of efficiency and instability in global finance address given by the governor of the bank of italy, dott. antonio fazio, at an international conference celebrating 50 years of quarterly review / moneta e credito in rome, on 20 / 11 / 97. in the wake of the great depression and the second world war, the new monetary system set up by the bretton woods agreements, together with the liberalisation and expansion of international trade, laid the foundations for a long period of economic growth and stability. from 1950 to 1973 the world economy grew at an annual rate of 4. 9 % ; the industrial countries achieved 4. 4 %, latin america, asia and oceania a higher rate. inflation was a little above 3 % in the industrial countries and less than 5 % in the world as a whole. the economic devastation of the great depression had undermined the classical vision of the economy based on the hypothesis of equilibrium, in which the action of policy - makers was constrained by the rigid rules of the gold standard. following keynes, in the new monetary order economic policies were assigned a pre - eminent role in governing the cycle. controls were imposed on capital movements to permit interest rates to be managed in pursuit of domestic objectives. the liberalisation of trade contrasted with a segmentation of the market for savings and financial assets on a national basis. current account imbalances were to be promptly corrected by means of a fiscal policy serving to re - establish the equality between saving and investment. the system broke down in august 1971, with the suspension of the dollar ’ s convertibility into gold. the main cause of the crisis lay in the us budget and balance - of - payments deficits, which generated an overhang that was incompatible with the dollar ’ s role of anchor. other factors included economic policies in most countries focused primarily on domestic growth and employment, the rise in public expenditure in relation to gdp, the emergence of international financial markets and increasingly large flows of hot money, which reduced the effectiveness of the restrictions on capital movements. in a situation where monetary policies were still concerned with the control of interest rates rather than credit flows and the quantity of money, floating rates ended up by fostering an increase in inflation in the industrial countries and in the rest of the world. monetary growth in the leading industrial countries continued, at an annual rate of 13 %. the oil crisis had an impact that was simultaneously inflationary and recessionary. the growth rate of the industrial countries slowed to