past, at least partly for prudential reasons, which were stable, but probably not very efficient in terms of cost control or funding of real investment. 14 to mention an extreme case, the soviet banking system was certainly stable, but it was not efficient. when excessive forms of regulation and control are abolished, the productive efficiency of banks is likely to be enhanced. in the short run, however, such deregulation may undermine the profitability of less competitive banks and therefore their resilience to shocks. the market process can thus lead to the removal of inefficient banks to the benefit of the more efficient ones. at the same time, abrupt and inadequately prepared or sequenced deregulation can lead to instability, as financial institutions and markets may not be sufficiently prepared for the new environment. for example, the phasing out of regulation q in the united states in the early 1980s increased the cost of thrift institutions floating - rate liabilities relative to their fixed - rate assets and adversely affected profitability and capitalisation in the industry. this development – combined with high and volatile interest rates of the late 1970s and early 1980s – together with various other factors, played a very important role in the savings and loan crisis of the late 1980s. 15 the specific examples i mentioned are circumstances in which public policy can be confronted with a trade - off, at least in the short term, between financial stability and financial efficiency. in the long run, however, i would regard this trade - off as being a fallacy. the interactions between efficiency and stability are complex, multi - faceted, and probably time - varying. a brief look at the academic literature on the relationship between competition and stability in banking confirms this. survey studies on the relationship between banking competition and stability tend to find that both theory and empirical evidence illustrate cases of complementarities between competition and stability as well as cases of trade - offs. some influential studies, however, may overstate the trade - offs. 16 for instance, one paper ( using partial and general equilibrium models ) shows that greater competition sometimes increases instability. 17 in other cases, when a model of bank contagion with imperfect competition is used, banks are less susceptible to contagion under imperfect competition compared to perfect competition. 18 there appears to be no consensus among academics as to which form of competitive structure may lead to the optimal combination of efficiency and stability in the system. 19 so much for the theory, what does the available evidence tell

stability and efficiency. this occurs in the context of the monetary and economic analyses underlying monetary policy decisions and in the context of the financial stability review, in which the outlook for financial stability is regularly assessed. moreover, the ecb ’ s initiatives to promote financial integration contribute, inter alia, to enhanced financial efficiency within the euro area and the european union. 3 there is, however, a fundamental difference between the roles played by the ecb in the attainment of these objectives : while the ecb has at its disposal the key instruments and powers needed to maintain price stability over the medium term and therefore to fulfil this mandate, it does not have the instruments and powers necessary to ensure financial stability and financial efficiency. the treaty did not assign the ecb any direct responsibility for the achievement of these two objectives. but, as i will argue, we can contribute to their attainment in various ways, including through the maintenance of price stability, which is an important pre - condition for financial stability and efficiency. i will now go on to address the following three issues : see ecb ( 2005c ) and hartmann et al. ( 2005 ) as well as the survey by levine ( 2005 ). similarly, woodford ( 2002 ) characterises financial efficiency as a situation where “ the dispersion of valuations of claims to future payments across different individuals and institutions is minimised. ” see our recent release of a regular report on “ indicators of financial integration in the euro area ” ( ecb 2005b ). • the contribution of monetary policy to financial stability and efficiency ; • the implications of financial stability and efficiency for the effective conduct of monetary policy ; and • the role of regulatory and supervisory policies in safeguarding financial stability and promoting financial efficiency. ii. the role of monetary policy ii. 1 the contribution of price stability to financial stability and financial efficiency monetary policy, by delivering price stability, contributes to the efficient functioning of the real economy and to economic growth and welfare through various means. first, it protects the real purchasing power of money and households ’ real disposable income. second, it enhances the proper functioning of markets and eliminates uncertainty created by high and volatile inflation rates. stable prices make it easier for people to recognise changes in relative prices as these are not blurred by the general upward drift of all prices. as a result, markets are better able to allocate resources to their most efficient use. third, price stability also facilitates long - term planning and