, the same goes for the abundant liquidity in asset markets that preceded the crisis. of course, persistently strong demand for financial assets – crudely, rising prices – created liquidity. but, beyond that, the willingness and terms on which “ market - makers ” and traders underpinned liquidity depended on generous access to credit for financing inventory and positions. and the ultimate private sector providers of such credit are always the commercial banks. 6 so commercial banks are special. they are special because their deposit liabilities are money. but they are also inherently fragile. first, as monetary institutions, the liquidity insurance they provide, via demand deposits and committed on - demand lines of credit, entails large mismatches between the maturities of their liabilities and assets ( actual and contingent ). the accompanying conversion of liquid savings into illiquid loans to households and firms benefits society. but it also exposes the banks to big liquidity risks. given a first come - first served system of redemption for retail and wholesale deposits, that creates the risk of runs. secondly, a deposit - taking institution is leveraged, even if it does not fund itself in wholesale markets : retail deposits are debt. so banks ’ capital adequacy can quickly be imperilled by a fall in asset prices. in that sense, the “ liquidity ” and “ solvency ” explanations of the current crisis are inseparable. especially in a world in which banks ’ trading portfolios are marked to market, a drying up of liquidity in markets brings about a fall in asset prices, and so a depletion of banks ’ net worth. all that underlines just why our predecessors placed such great weight on official interventions to maintain the safety and soundness of banks. 7 if anyone doubted it, this crisis underlines how problems of funding liquidity, asset - market liquidity and solvency are intertwined. and those dimensions of a systemic crisis map into the authorities ’ capability, in principle, to be a lender of last resort ; a market maker of last resort ; and a provider of capital of last resort. central bank provision of liquidity insurance, and lolr bagehot ’ s famous dictum, in lombard street, was that, to avert panic, central banks should lend early and freely ( ie without limit ), to solvent firms, against good collateral, and at “ high rates ”. one of his great themes was that the bank of england should acknowledge its

john hurley : protecting the stability of the irish financial system statement by mr john hurley, governor of the central bank & financial services authority of ireland, dublin, 3 october 2008. * * * the government decision to guarantee depositors in and lenders to irish financial institutions was taken to protect the stability of the domestic financial system. it does this by supporting the irish banking system ’ s ability to secure access to funds both domestically and internationally. the government ’ s decision was taken after close consultation with the central bank and financial regulator. for over a year now, the central bank has been monitoring the disruption in international financial markets. this was triggered by difficulties in the us subprime mortgage market and resulted in a protracted drying up of liquidity in a range of markets. despite central bank actions, both at eurosystem and global levels, to inject liquidity to improve the functioning of money markets, these markets have become increasingly impaired. the net effect was that banks internationally found it difficult, and expensive, to obtain term funding. the access of the irish banking system to term funding was affected in a similar way to their international peers. the pressures became particularly acute during recent weeks following difficulties in state - sponsored financial institutions, investment and high - street banks both in the us and then europe, and over the last weekend the failure to pass the us legislation. these events came to a head last monday evening when the supply of funding to the irish banking system was seriously threatened. at that time, i had to inform the minister that the risks to financial stability were becoming unacceptably high with knock - on effects for the wider economy. a major consideration was that the highly concentrated nature of the irish banking system created a high risk of contagion. decisive action to protect the stability of the economy and its financial system was needed. while the decision was difficult, it was aimed at ensuring renewed access to funding for irish financial institutions. the irish banking system, unlike many of its international peers, has not to date had to write - off significant losses on loans and investments so that bad debts and loan losses were not the key issues for our financial system last monday evening. the issue then was the unprecedented shortage of liquidity in financial markets and the urgent need to implement a solution that targeted that issue directly. the legislation giving effect to the government ’ s decision was signed into law yesterday. over the coming days, the central bank together with our colleagues in the financial regulator will be advising government on how the