higher productivity growth may lay the basis for high corporate earnings, heightened optimism and reduced risk awareness. at the same time, with strong productivity growth, inflation remains low. banks that record low losses and solid results can increase lending without eroding their capital. debt - financed investments may then lead to a faster rise in property prices. third, strong international competition may contribute to curbing inflation during a period of strong economic expansion. given that a conflict between the two goals may arise ; how are financial stability considerations incorporated into monetary policy decisions? there seems to be widespread agreement among central banks, that extreme events which could threaten financial stability should be met by resolute use of monetary policy. for example, leading central banks made an effort to ensure continued liquidity in the markets in the aftermath of the terrorist attack on the world trade centre on september 11, 2001. as a consequence, the risks confronting the financial system were limited. however, risks to financial stability due to evolving financial imbalances are likely to develop over a long period of time. from this perspective, the question of whether financial stability considerations should be explicitly included in monetary policy is heavily debated, both in academia and within central banks. the answers diverge and international consensus has not yet been reached. one view is that an explicit and proactive monetary policy response to financial imbalances is neither desirable nor feasible. a number of concerns have been raised to explain this view. first, it is well documented that asset price bubbles and financial imbalances are very difficult to identify ex ante. second, the appropriate timing of a proactive monetary response is likely to be difficult to determine, given the lags in the impact of monetary policy. third, even in the case where the central bank knew that financial imbalances were building up, the size of the interest rate rise needed to reduce the imbalances might be so large that it could lead to a severe economic downturn. a more general concern is the potential moral hazard risk of a systematic proactive response of monetary policy to financial imbalances. for example, investors may “ undervalue ” the risks they take on if they expect that the central bank will act to offset future financial instability concerns. in later years, the idea of using monetary policy to prevent a build - up of financial imbalances has received increased attention. several central banks can be seen as supporters of taking into account the impact of financial imbalances on future output and inflation. the selected quotes

to establish leadership. with four ministries of finance involved, the choice of leadership will not be straightforward. the traditional view is that the host - country authorities are responsible for subsidiary banks, while home - country authorities are responsible for branches. 5 this view is closely linked to the legal difference between subsidiaries and branches. subsidiaries are independent legal entities, while branches are not legally independent from their parent bank. however, host country authorities have little influence over foreign banks ’ crisis management. one of the key issues is whether the home country authorities, in a crisis situation, should be obliged to take into account the effects of the crisis in other countries where a bank has branches with extensive activities. borchgrevink, henrik and thorvald grung moe ( 2004 ). ” management of financial crises in cross - border banks ” norges bank, economic bulletin, no. 3 / 04, pp. 157 - 164 there are arguments to suggest that home - country authorities should have more responsibility for host banks also in a subsidiary bank structure. this would reduce the number of authorities that banks have to relate to. it is also in line with developments in banking where an increasing number of cross - border banks are organised as global firms with subsidiary structures under central management. the question of coordination is far from being solved. one possible way forward is to transfer some responsibility to supranational institutions. as transfers of responsibilities imply transfer of control, this solution is not a simple one in political terms. in the eu, the idea of a european supervisory authority has so far met resistance. a fundamental problem – especially in the case of a financial crisis – is the lack of a corresponding supranational fiscal institution. today, any financial support must be granted by national authorities. without formal supranational solutions in place, it is all the more important to ensure cooperation between the central banks and supervisory authorities involved. the fact that a large share of the financial institutions in the new eu member countries are foreign - owned makes this issue even more relevant. in june 2003, the governors of the nordic central banks signed an agreement on the management of a potential financial crisis in a nordic bank with activities in two or more nordic countries. the agreement contains procedures for the coordination of crisis management between the central banks. the nordic supervisory authorities have drawn up a similar cooperation agreement. one particular problem in the nordic region is the differences in the countries ’ deposit guarantee schemes. the different schemes vary both with respect to guaranteed amount and type