losses where they belong. if the authorities intervene and bail out one bank, expectations are created that they will also bail out others. we may then end up with a system in which banks take excessive risk, potentially increasing the likelihood of new and greater banking crises in the future. therefore, banks should not be bailed out. we are facing a dilemma. bailing out banks increases the risk of instability in the long term. yet the cost of refraining is even greater instability in the short term. once the crisis has arisen, there is no escaping it. if banks are facing sizeable losses, then someone must bear those losses. if we do not allow the treasury to bear the losses through support for the banks, the populace will still be affected, especially if the consequence is a systemic crisis and economic downturn. this dilemma is what is called a time - inconsistency problem. in principle, it may be desirable to allow insolvent banks to fail, but there will be valid reasons to depart from this principle when actually faced with the decision. this means that even if it is the stated intention of the authorities to refrain from bailing out banks, this intention will not be particularly credible. in other words, and put succinctly : banks should not be bailed out, but they must be bailed out nevertheless. who should be bailed out? if we must bail out banks to avoid an economic breakdown, the next question is : is there anything we can do to reduce the damage arising from setting aside normal bankruptcy rules? the question becomes how, rather than whether, banks should be bailed out. or more directly : who should be bailed out? imf global financial stability report, october 2008, contains averages for leverage ratios of both commercial banks and investment banks. morris, steven and shin, hyun song ( 2008 ), “ financial regulation in a systemic context ”, brookings papers on economic activity, vol. 2008 ( fall 2008 ), pp. 229 – 261 reports figures for the large us investment banks. bis central bankers ’ speeches it is a critical function for a bank to accept and provide access to deposits. depositors must have confidence that their deposits are safe. arrangements that guarantee deposits and the ability of solid banks to meet their obligations stabilise banks and support a socially beneficial activity. such measures are intended to reduce banks ’ susceptibility to panicky withdrawals. moreover, ordinary considerations of fairness dictate that small deposit

raised further in september. 3 / 4 bis - central bankers'speeches if the krone proves to be weaker than previously projected or pressures in the economy persist, a higher policy rate than signalled in june may be needed to bring down inflation. if there is a more pronounced slowdown in the norwegian economy or inflation declines more rapidly, the policy rate may be lower than we have envisaged. the economic outlook is uncertain. but there is no uncertainty about the objective. we will set the policy rate so that inflation stabilises at close to 2 percent. by doing so, we are helping to restore households'purchasing power and promote high employment and economic stability over time. 4 / 4 bis - central bankers'speeches