process of disinflation. in part, this is being fostered by international developments in the prices of commodities and crude oil – incidentally, with quite positive terms of trade effects for the oil - importing euro countries. in germany, for example, core inflation is about 1 %. – 3 – ‘ deflation is not on the agenda, ’ stanley fischer, the imf ’ s deputy managing director, recently underlined. the present price stability and the low level of interest rates in the capital market indicate the absence of inflation expectations. that provides the opportunity for longer - term inflation - free growth. iii if it appears rather unlikely that the crises in parts of the world economy will spread to america and europe through the real economy, is it not possible – given a loss in confidence – that this could happen through the channel of the financial markets? keyword ‘ credit crunch ’ a number of observers fear, for example, that the current uncertainties in the financial markets might cause financial institutions to refuse financial resources even to first class borrowers in future – with matching implications for investment and growth. there would be various reasons for that : • first, financial institutions change their risk preferences, especially as a result of disappointed confidence or an expected recession. at least for a while, there may be a higher risk aversion overall. • second, financial institutions find themselves subjected to an erosion of their capital base. they then have to show restraint in terms of further exposures – even to top - rated borrowers – in order to restore appropriate financial ratios. a rise in the cost of equity can even reinforce that. • third, the assets deposited as collateral decline in value, say, as a result of a fall in asset prices in the real property or equity markets. in some cases, however, what is worrying about a credit crunch is the idea that the normal price mechanism balancing supply and demand is being paralysed in the credit market for specific reasons. in a ‘ credit crunch ’ scenario – so the theory goes – financial institutions do not respond to a rise in demand for credit by raising the lending rate and extending their supply of credit. that is because they fear a disproportionate rise in the share of demanders of credit with comparatively risky projects – the keyword is ‘ adverse selection ’. moreover, after receiving credit, the debtors would have an incentive to enter greater risks – the keyword is ‘ moral hazard ’. if banks have difficulty in assessing their

to 2 / 6 bis central bankers'speeches any potential future losses. looking beyond this particular case, one thing is clear : while the use of public funds will be made more difficult under the new resolution rules and will only be permitted subject to compliance with certain criteria, it has not been taken off the table completely. yet the fact that government aid was provided to as many as three of the first four banks to run into difficulties cannot be in the interest of european legislators. our resolution regime should be measured against how effectively it shields national taxpayers – and i firmly believe that this should also be the goal of national insolvency law as well. before i go on to talk about the actual resolution cases in greater depth, let me take this opportunity to draw three conclusions from the crises as viewed from a banking supervisor ’ s perspective. first, it will not be possible to draw up a straightforward supervisory blueprint for dealing with future crises. as a general rule, every crisis tends to be different and there is no “ one size fits all ” approach to resolving them. we observed this recently in italy and spain. the institutions there differ in terms of the reasons why they ran into difficulties, their positions in the banking market and their standing in their respective economies. however, we must nevertheless learn specific lessons from each individual case. second, as this issue concerns appropriate, tailored solutions – and therefore discretionary scope as well – efficient decision - making processes are required. in this context, coordination between all of the institutional stakeholders plays a very important role. as crisis situations will always be unique, we need to ensure that all decision - making factors are incorporated sensibly and objectively. third, we need to grasp that banking supervision certainly can, and must, deliver far more than dealing with acute difficulties in the banking sector. as a general rule, it kicks in far earlier by ensuring compliance with the rules, thereby tackling unwelcome developments in good time. european supervisors have set new standards as far as the last point is concerned. capital addons, for instance, which are set following the annual supervisory review process, have become far more important than they once were. and that is as it should be. having learned from the crisis years, banking supervisors have strengthened their early warning systems and early intervention capabilities. supervisors now go beyond the scope of an institution ’ s solvency and liquidity – these days, they normally also examine business models and governance, as unwelcome developments in these areas