was not as rapid as in iceland or even ireland, but total deposits had reached 3½ times gdp by the end. as in ireland, exchange rate movements were not an issue insofar as the euro is the national currency. for cyprus, the classification “ resident ” is sometimes challenged, but taking it at face value we find that loans to residents in cyprus at 74 % of the total, exceeded residents ’ share of deposits at 62 %. the difference meant that residents borrowed more than €10 billion more than they deposited with the banks – about 60 per cent of gdp. thus, while the banking system in cyprus has been considerably exposed to other countries, notably greece ( both restructured government bonds and problem loans reportedly associated in particular with laiki bank ), it is neither a situation where foreign funds have been employed in net terms to fund the domestic fiscal authorities, nor to fund a domestic property bubble on the scale that occurred in ireland. instead, the scale of foreign funding enabled the main banks to become exposed to greek official debt and to make loans of doubtful quality to cypriot, greek and other borrowers, which resulted in losses that promised to demand recapitalisation on a scale unaffordable by the cypriot state. while the mechanism adopted for bailing - in the bank creditors ( and certainly some of the earlier proposed mechanisms ) in order to boost the capital position of the banks can be criticised – and certainly underlines how welcome is the european legislation on bank resolution, now in advanced stage of negotiation – there are also lessons for macroprudential regulation. * * * the fact that the most affected banks in cyprus have also been the main retail and payments banks for the national economy has resulted in broad economic disruption, including the introduction of exchange and payments controls, and haircuts on transactions balances of companies. here the “ domestic financial shield ” mechanism has been ineffective in protecting the foreign depositors, but was itself broken in the collapse. 3. concluding remarks by avoiding the melange of export banking with the domestic banking sector, some of the macrostability risks of having a large banking sector doing international business can be reduced. fiscal resources will not be stressed and the domestic economy will not be bis central bankers ’ speeches destabilised by an export banking sector if its funding and lending is largely focused on the rest of the world. without such separation, extremely prudent and active management is needed to avoid trouble in systems with large banking sectors. one can even imagine devi

consultation, in which irish institutions were among the most prominent in the number and comprehensiveness of their responses. the new arrangements involved a change in the timing of the reserve maintenance period and shortening the maturity of the main refinancing operations from two weeks to one week. the intention of these two revisions was to eliminate the effects of expectations of interest rate changes on bidding behaviour. the ecb also enhanced its communications with market participants and increased transparency by publishing a benchmark allotment for each main refinancing operation. the benchmark allotment is the amount that allows for neutral liquidity conditions and the market can now compare the actual allotment with this benchmark amount. the implementation of the recent changes went smoothly and counterparties quickly adapted their bidding behaviour to the increased allotment amounts in the weekly operations. a favourable outcome has been an overall stabilisation of the spread between the overnight rate and the minimum bid rate during the reserve maintenance period. another, almost inevitable, consequence of the changes has been the increased incidence of liquidity imbalances at the end of the reserve maintenance period, which has been reflected in increased volatility in the overnight rate on the last day of the period. the ecb has responded with more frequent fine - tuning operations and it recently consulted with market participants, via its money market contact group, on other possible approaches that might help to reduce volatility. the eurosystem institutional set - up, involving centralised decision - making on monetary policy issues and decentralised implementation of policy presents special challenges in the area of communication. such arrangements demand that the eurosystem keeps in touch with local market participants and opinion. i would like to outline a few examples of how this achieved. local market views are collected by the bank and provided to the ecb on a daily basis. together with the views of the rest of the euro - area market, these play a part in the ecb's management of the euro - area money market. we in the bank also conduct annual money market surveys and periodic bond market studies, which feed into wider euro - area market studies and these in turn are published by the ecb. another communication forum is the dublin markets contact group. this group of banks, representative of the local market, meets under the auspices of the bank's financial market department. we use this forum to provide feedback from similar groups established at eurosystem level while local issues that arise in the dublin market are fed