axel a weber : financial market stability speech by professor axel a weber, president of the deutsche bundesbank, at the london school of economics, london, 6 june 2008. * * * introduction financial markets perform an indispensable task for economic well - being. they provide the services and products by which the intertemporal allocation of savings and investments is accomplished. as such, financial market stability is a precondition for macroeconomic stability and economic growth. an efficient allocation of funds presupposes that the necessary flow of information between borrowers and lenders is sufficiently stable to overcome the inherent information asymmetries between both parties. risks to financial stability, on the other hand, imply also risks to the real economy and to overall economic stability. it should come as no surprise then, that central banks in their strive for macroeconomic stability always had a keen eye on developments in financial markets and an interest in preserving financial stability. and the abundance of published financial stability reports over the recent past is indicating that the respective resources invested by central banks have been increased visibly over the past couple of years. it would have not needed the most recent financial market turbulences that started last summer to drive home that point. however, the events since last august have made clear for even distant observers that central banks have a natural interest and responsibility to safeguard developments on financial markets. aaa, abcp, abs, cdo, cds, spv, siv – until just under a year ago, these abbreviations could only be found in the financial press, if at all. this has radically changed in the past ten months or so. what was previously only of little interest to outsiders has thus moved into the limelight of public attention, within a very short time period. much the same can be said of the regular weekly recurring refinancing operations of the eurosystem central banks, through which the commercial banking sector is supplied with central bank money. while interest rate decisions often receive public attention, such money market operations have so far been regarded largely as a purely technical matter and have very rarely been covered by the financial press. in the meantime, however, the public interest in our operational framework has made clear that monetary policy involves more than just tweaking the interest rate. in my following remarks i would like to touch upon some issues in the context of financial markets and monetary policy. at first, i would like to explain the meaning and importance of financial stability for central banks. then i

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