with the weakest public institutions are not in a position to overcome their economic policy difficulties on their own. with european rules that are quasi - automatic, fast - acting and sensitive to market signals, they draw on the stronger countries for the determination they themselves lack. much has been done in controlling deficits on the front of the public finances, but the fundamental pillar of financial stability is economic growth, without which debts will not be repaid. this is the front on which the union ’ s cohesion will be tested : the ability to foster harmonious, rapid, sustained growth embracing all the member states, with common rules that, like those governing the public finances, help the countries lagging behind in undertaking the structural reforms needed if they are to return to faster growth.

fail, one of the largest failures in new zealand ’ s history. another bank would have failed had its private sector shareholder not been in a position to inject very large amounts of additional capital, and even after that was done the institution was eventually wound up. at no point did it look likely that the whole banking system might fail, but we certainly had major problems with some of the largest participants in the system. what lessons did we learn from that experience? there were of course a whole host of factors which caused these difficulties. one important factor was the sheer inexperience of many of our bankers : they had been accustomed to a highly protected environment, and were ill - prepared to deal with the demands of a deregulated environment. nevertheless, i think there were four important lessons. while every country has to make judgements and decisions in the light of its own particular circumstances - and certainly no two countries are exactly alike - some of the things we learnt may have relevance to other countries also. lessons from new zealand : encourage banks to behave prudently first, it is important that banks are given every incentive to behave prudently. this may seem a self - evident statement, but it is astonishing how frequently the importance of this principle is ignored. in new zealand ’ s case, we diminished this incentive to behave prudently by allowing the view to go unchallenged that banks were effectively ‘ sovereign risk ’, or at least ‘ too big to fail ’. this meant that bank creditors felt little need to assess the creditworthiness of the banks with which they deposited funds - banks were, it was widely believed, effectively guaranteed by government. bank boards and managements may have felt similarly protected against the possibility of failure, and made loans with a disregard for risk which was, in some cases, breath - taking. this so - called ‘ moral hazard problem ’ may have been particularly severe in the case of two of the three institutions which got into serious difficulties in the late 1980s, both of them owned wholly or in part by government. there was little or no direction of their lending by government, but the management of both institutions certainly embarked upon lending transactions in the newly liberalised environment which rapidly got them into serious difficulties. in some asian countries, it is possible that the incentive for banks to behave prudently was seriously eroded not only by the impression that most large financial institutions would not be allowed to fail but also by the extent to which governments directed the lending activities of