on just where the balance is struck - the onus for resolving the situation has to fall back on the borrowing country and on its creditors, who cannot avoid taking ultimate responsibility for their own lending decisions. so there is a link between the review of the imf ’ s facilities and what has come to be called - in the jargon - psi, or private sector involvement in crisis resolution. and that link remains to be clarified. just how these issues are resolved will have an important bearing upon global economic and financial stability, and in turn, upon the safety of our national banking systems. somewhat similar considerations apply in the narrower national context. where, for whatever reason - which may be a result of macro - economic mismanagement by the authorities themselves or a result of mismanagement by banks or other financial institutions - there is a threat to the stability of a sizeable part of the financial system as a whole, it is the national authorities ultimately that have to deal with it. they can seek to reduce the risks of systemic problems originating in the financial sector in particular in a number of ways. firstly, there is regulation or supervision of individual financial intermediaries which may, as here in sri lanka be undertaken by the central bank itself or by a separate financial supervisory agency as now in the uk. financial supervision - including banking supervision - is a powerful instrument for preventing systemic financial disturbance, even when - as in the uk - the primary objective is to provide a degree of protection to the investors or depositors in individual financial intermediaries rather than to protect the system as a whole. but it necessarily has its limitations. the job of the supervisor in this context is essentially to set appropriate minimum standards for the authorisation and prudential conduct of financial institutions and to satisfy himself ( or herself! ) as far as possible that these standards are being observed. it is not the job of the supervisor actually to micro - manage the institution or the particular risks that it takes. that has to be the job of the management of the institution - indeed the taking and management of financial risk is the essence of their contribution to society ; it ’ s what they are paid for! nor is it the job of the supervisor to prevent each and every bank failure. indeed, if the supervisor were to attempt to do so, it would inevitably involve such rigorous prudential standards and enforcement that it would effectively stifle innovation and competition, at the cost of reducing the efficiency of the financial system in meeting the needs of

countries in difficulties, this “ safety net ” or lender of last resort ( lolr ) capacity needs to be used with great discretion if it is not to give rise to a similar kind of moral hazard - encouraging banks and their creditors to take excessive risks. it is only to be used where there is a genuine risk of systemic financial disturbance - where other banks are liable to be affected by contagion either as a result of their direct exposure to a failing institution or because they are likely to be seen themselves to be exposed to the same sort of pressures that affected the failing institution, and therefore likely to be similarly vulnerable and subject to loss of confidence. it is only in those circumstances - which i agree are difficult to recognise with total confidence - that official intervention can be justified. the safety net is not there to protect every individual institution that gets into trouble as a result of its own failings. even where it is judged that there is a systemic threat - and a public interest in containing it - a judgement that will properly need to be openly justified at the appropriate time - last resort assistance like imf assistance to its member countries - has to come with conditions. the purpose of last resort assistance is not to protect either the shareholders or the management of an illiquid, even less an insolvent institution, and the appropriate outcome may well be an orderly run - down or sale of the business. that may sound severe - even threatening to commercial bankers. but it is necessary both to ensure that moral hazard does not undermine the safety and soundness of the banking system and to maintain its competitive efficiency. pulling all this together the “ authorities ” - governments, financial supervisors and regulators, and central banks - have a vital role in creating and sustaining a safer, sounder, banking system. but in the end it depends critically on you - the professional, commercial, bankers. yours is a tough job at the best of times. it is especially challenging in today ’ s environment of rapid financial change as a result in particular of the inter - action between deregulation and increasing competition, globalisation and the revolution in information technology, which are constantly bringing new dimensions to your unenviable task of risk management. your own survival and prosperity - and that of the institutions that you manage - depend ultimately upon your abilities as risk managers. but to the extent that each of you individually succeeds in your own business, you also make a vital contribution to the safety and soundness of the banking system as a