yves mersch : the financial crisis – challenges and new ideas speech by mr yves mersch, governor of the central bank of luxembourg, at the luxembourg school of finance, luxembourg, 28 january 2010. * * * i am very pleased to be here tonight and wish to thank the luxembourg school of finance for providing me with this opportunity to speak on the recent financial crisis, the policy response, and the challenges ahead. the run - up to the crisis was driven by animal spirits, which encouraged excessive risk - taking by investors and a significant increase in financial sector leverage. asset price declines triggered an unexpected departure from the normal functioning of the financial system, plunging agents into unquantifiable “ knightian ” uncertainty. this unleashed panic, characterised by a “ flight to safety ” and fire sales of financial assets that amplified the crisis. the risk to systemic stability required intervention by the authorities that was unprecedented both in its extent and in its form. it is important to recall that we have very limited knowledge of many aspects of the crisis. all financial crises share certain phases of market behaviour, but they are all different. in recent years some warnings highlighted existing imbalances and vulnerabilities, but nobody predicted the timing and nature of such a sudden break in market behaviour. as the crisis unfolded, authorities had to take policy decisions rapidly although their effects had become uncertain, as normal market functioning could no longer be expected. what was most surprising in the recent crisis was the role played by liquidity. in retrospect, it is easy to conclude that it should have been monitored more closely and that pro - cyclical behaviour needed to be mitigated more effectively. however, these suggestions only represent “ preventative care ”. the implementation of such measures could reduce the likelihood, or at least the extent, of future crises. once a crisis hits, it is too late for “ preventative care ” and the authorities have to implement “ emergency interventions ”. these carry significant costs for the taxpayer, so it is natural to ask how the private sector can help share this burden. in my remarks, i will begin with the recent past, reviewing the crisis and the policy responses of both central banks and governments. then i will turn to the lessons of the crisis and the challenges both in the immediate future and at a longer horizon. i wish to focus on the need to reform the current financial architecture. this process is already underway at the global level as the april meeting of the g20 endorsed financial stability board

yves mersch : about the role of central banks in financial stability and prudential liquidity supervision, and the attractiveness of islamic finance speech by mr yves mersch, governor of the central bank of luxembourg, at the 2nd islamic financial services board public lecture on financial policy and stability, kuala lumpur, 8 february 2009. the author thanks li - chun yuan and charles hurt for their contribution to the preparation of this paper. the original speech, which contains various links to the documents mentioned, can be found on the central bank of luxembourg ’ s website. * * * excellencies, ladies and gentlemen, introduction it is my honour and great pleasure to address this distinguished audience at the celebration of the 50th anniversary of the bank negara malaysia. the current crisis has revealed very strong information - related synergies between the central banking and the prudential supervisory functions. to discharge their core function of maintaining systemic stability, central banks are searching for information relating to individual institutions ’ liquidity and solvency positions, intra - group exposures, banks ’ liquidity and funding policies as well as data related to potential channels of contagion. supervisory authorities on their side look for information on money and financial markets, banks ’ liquidity positions and collateral provided by banks in open market operations, patterns of banks ’ recourse to payment systems and volumes in post - trading systems. to summarize, liquidity - related information is of the utmost importance both for central banks and prudential supervisors. this is also the reason why on 1 june 2008 the ministers of finance, the supervisory authorities and the central banks of the european union signed a memorandum of understanding on cooperation between the financial supervisory authorities, central banks and finance ministries of the european union on cross - border financial stability. this memorandum applies both in times of financial distress and in normal periods. it has the benefit of containing an allocation of tasks between the authorities in charge of financial stability. depending on the nature of the issues at stake, one of those authorities will coordinate, as the “ national coordinator ”, activities in order to enhance preparedness in normal times and facilitate the management and resolution of a crisis at the national level in a particular crisis situation. the national coordinator is designated by virtue of its legal competences in the field of financial stability. consequently the memorandum of understanding confers upon central banks the role of national coordinator in case a liquidity crisis could affect a cross - border financial group with a potential for systemic implications 1. see, memorandum