be mindful not only of the stability of the financial system, but also its efficiency. while in many cases, policies designed to improve the stability of the financial system also improve its efficiency, this is not always the case. a highly regulated system might well be very stable, but it is unlikely to be very competitive or innovative. the bank ’ s broad policy responsibilities require it to balance these various considerations. handling of a financial crisis the other situation in which the reserve bank will be required to play an important role is if a financial disturbance actually occurs. it is unrealistic to expect that financial regulators will be able to prevent all financial disturbances. the bank, therefore, needs to be able to respond to disturbances when they happen. the main way in which it would do this is through the use of its balance sheet to provide liquidity to the financial system. the bank ’ s preference would be to do this through its usual daily operations in the cash market, providing liquidity to the market as a whole, rather than to individual institutions. nevertheless, in the highly unusual case in which a fundamentally sound institution was experiencing liquidity difficulties, and the potential failure of the institution to make its payments posed a threat to overall stability of the financial system, the bank would be able to provide a lender - of - last - resort loan directly to that institution. in principle, a lender - of - last - resort loan could be made to any institution supervised by apra. it is important, however, to make clear that the reserve bank ’ s balance sheet is not available to prop up insolvent institutions. put more plainly, the reserve bank does not guarantee the repayment of deposits in financial institutions. indeed, the recent legislative changes have removed from the bank the responsibility for protecting depositors. this is now apra ’ s responsibility, and apra has the power to issue directives to institutions, to revoke licences and to arrange for the orderly exit of troubled institutions. obviously, if it were necessary to undertake any of these actions, apra and the bank would consult closely in order to limit the flow - on effects to the rest of the financial system. ( iv ) has the financial system become more or less stable? from a purely australian perspective, our biggest financial crisis was in the 1890s. although the 1930s was comparable as an economic contraction, it was a lot smaller as a financial crisis. 6 and for the first four post - war decades financial instability was rarely in the

it makes to ensuring a more prosperous and more fully employed economy. it is also important that we receive recognition as a country that has a world class financial infrastructure which is capable of maintaining this stability into the future. our recent exemplary performance has helped in this regard. but the task of ensuring we have an acceptable degree of financial stability in the years and decades ahead is a never - ending one. no - one can or should guarantee that no financial institutions will fail, any more than no manufacturers or retailers will fail. in fact, in an ideal world there would be a scattering of small disturbances every year or two to keep everyone on their toes. unfortunately, the real world is not like this : there are long periods of calm when virtually no financial disturbances take place and rising prosperity is taken for granted, creating a false sense of security and eventually leading to short periods which contain several failures and the threat of many more. the requirement for all those involved in ensuring financial stability is to be alert and pro - active during the long periods of calm, just as an army must be during peacetime. there is a constant challenge to be found in identifying new risks, avoiding harmful incentives and adjusting the regulatory arrangements to keep pace with changes in financial technology. it is not an easy task, but i am confident that the major regulators – apra, asic and the reserve bank – are up to it. bibliography bernanke, b. ( 1983 ), “ nonmonetary effects of the financial crisis in the propagation of the great depression ”, american economic review, 73 ( 3 ), pp. 257 - 276. butlin, s. j. ( 1958 ), richard charles mills, the university of sydney, mimeo. caprio, g. and d. klingebiel ( 1996 ), “ bank insolvencies : cross - country experience ”, world bank policy research working paper, no. 1620. diaz - alejandro, c. ( 1985 ), “ goodbye financial repression, hello financial crash ”, journal of development economics, september / october, 19, pp. 1 - 24. fisher, c. and c. kent ( 1999 ), “ two depressions, one banking collapse ”, reserve bank of australia research discussion paper, forthcoming. goodhart, c. ( 1985 ), the evolution of central banks. a natural development?, london school of economics and political science, imediaprint, london. llewellyn, d. ( 1992 )