is highly transparent for the market, e. g. regarding in - house procedures, which is hardly feasible. allow me to briefly outline the german prudential approach : • banking supervision is guided by the principle that a bank's management is responsible for its business decisions. therefore, banking supervision in germany does not actively intervene in banking activities, i. e. by making specific recommendations. • from the central bank's perspective, i would like to stress that it cannot be the task of a central bank to bail out insolvent credit institutions. the ministry of finance would be responsible for that, if tax revenue were required for assistance measures. but even cases such as financially sound institutions merely having liquidity problems should, if possible, be resolved with the help of private or semi - private lenders before reaching the gates of the central bank. the liquidity consortium bank in germany is such a “ lender of penultimate resort ”. in addition to the three categories of credit institutions, the bundesbank also has a stake in this consortium bank, and it provides refinancing against collateral. apart from that, the bundesbank has not committed itself in a binding manner to take action in the event of a crisis. it would also be – 2 – desirable if a liquidity consortium bank or comparable institutions were established in other european countries. • if it were not possible for the creditworthiness of an institution to be restored either by other institutions or with the help of the deposit guarantee scheme, having that institution exit the market would, in general, be a feasible consequence. however, if such a step posed a serious threat to the stability of the banking system, i. e. if the institution in question were “ too big to fail ”, a joint solution would have to be found by all the private market players and public bodies concerned. already the number of institutions we must consider to be “ too big to fail ” has risen in the recent past, and further mergers will cause this number to keep rising. mergers of global players do not only raise new questions in banking supervision. they also pose the risk that size leads to moral hazard effects. for precisely this reason, each crisis must be assessed individually. the key principle is that the government's response must not be predictable and that private market players should be involved in potential rescue operations to the greatest possible extent. • the recent financial crises have been increasingly drawing attention to international crisis management. in my opinion, the aforementioned principles should

be applied in this context, too : there should be no explicit or implicit government guarantees regarding the solvency of the respective banking system ; temporary liquidity crises should be resolved, wherever possible, before government intervention becomes necessary ; the private sector should be comprehensively involved both in crisis management and in loss - sharing. • international support measures must always remain an exception and never become the rule. under no circumstances should private investors be able to rely on public bodies to assume their losses in the end. instead, i believe it would be desirable to create an international liquidity safeguarding fund made up of the major global players, which would also have the most to gain from a largely deregulated and sound financial system. this will not be an easy undertaking, since there seem to be few incentives for a bank to assume other institutions'risks. nevertheless this road should be taken in order to strengthen market discipline. i believe that membership in a club comprising the major global players would be a special quality which could actually become attractive for those institutions. besides, it seems quite conceivable that banking supervision might be willing to grant those institutions more selfregulatory powers. the case of the hedge funds ltcm proves that the private sector can find solutions without having recourse to public funds. at that time, the federal reserve bank of new york was only acting as an intermediary to bring national and international financial institutions together, which then provided the necessary funds. the same principle applies both nationally and internationally : moral hazard problems can only be prevented by emphasising and requiring that responsibility be taken by financial market participants, and by limiting the intervention of public bodies. avoiding moral hazard will also increase the stability of the system and improve crisis management. * * *