the downswing ), inadequate or inappropriate regulation ( e. g. weak points in basel ii ), excessive confidence in markets and models ( e. g. var ), false incentive systems ( such as implicit state guarantees for systemically important banks ), and complex and intransparent products ( e. g. complex securitised loans ). in summer 2007, these factors were combined or interacted with one another to create a situation where confidence was suddenly withdrawn from the global financial system, which then went out of control. even though three years have now elapsed since the start of the crisis, it would be rash of us to claim that we have clearly identified the cause of the accumulation of the systemic risk revealed in the crisis and are now in a position to prevent the accumulation of such risk in future. for instance, although the bubble in the us housing market was identified at a relatively early stage, its threat to the system was totally underestimated. this fact clearly shows that systemic crises and their effects are difficult to forecast. even in summer 2007, as it became obvious that the us housing market was in a very precarious situation, almost no - one foresaw the huge impact this would have on the global financial system and the world economy. ladies and gentlemen, we are all aware that systemic crises will occur again and again. this is because risk in the financial system pro bably always emerges at a moment when we are not yet in a position to fully identify or understand it. however, irrespective of this fact, at this point i would like to stress how important it is that we use all the resources at our disposal to try and contain the effects of systemic crises or lessen the probability that such a crisis will occur, at the very least, even if we are unable to prevent crises altogether. first, systemic crises are enormously costly. naturally, that alone does not justify state intervention. however, the legitimation for active state intervention can be derived from the fact that systemic risk gives rise to negative externalities, i. e. market failure, if it is not taken into account in the decision - making considerations of market participants. this means that the social costs of systemic crises are higher than the private costs. in the financial sector, this issue is particularly delicate, because of specific characteristics that can give rise to negative systemic externalities of the kind i have just described. 1 i will return to this important topic later in my

those with a somewhat lower rating will be confronted with an outflow of deposits while the top names in the industry receive an influx of deposits. this generates stress which can only be reduced by efficiently re - channelling funds between banks. it is obvious that the availability of sufficient collateral is crucial. the availability of collateral - just in case - is therefore the central focus of liquidity planning. in the case of switzerland, the potential re - channelling problem has both an aspect ameliorating the problem and one making it more difficult. what may actually ease the situation is the fact that the cantonal banks, with roughly one - third of the market share, operate with a state guarantee. they are, therefore, not likely to face any outflows of deposits. the swiss franc money market, on the other hand, is dominated by the two big banks. these play a key role in ensuring the stability of the system and therefore must shoulder a heavy responsibility. role of the swiss national bank central banks also play a significant role in the preparations toward securing liquidity. they are the providers of central bank money which is the medium with which the final settlement of payments is carried out. i would like to give the following brief outline of our plan : 1. banks and the public can count on our providing the liquidity necessary for coping with the millennium generously and flexibly, i. e. by maintaining a continuous presence in the market. i do not think that there is any basis to the objection that such a promise will lead to a moral hazard. firstly, because the liquidity planning of each bank is monitored and enforced by a supervising body. secondly, because we will create liquidity on a collateralised basis only. 2. we will provide liquidity with the usual monetary policy instruments on a spot and - if appropriate - forward basis. we are aware, however, that the processes connected with the individual instruments differ considerably as regards their vulnerability to malfunction or breakdowns. settlement of a foreign exchange purchase against swiss francs, for instance, is relatively complex and therefore exposed to a non negligible operational risk. settlement risks with repo transactions, however, are significantly lower because in our system, collateral must only be transferred between accounts by the central securities depository. this is a simple and straightforward process which - if necessary - could even be implemented manually. consequently, we encourage banks to pay special attention to their holdings of repo collateral when engaging in their liquidity planning.