conference cycle, “ thinking portugal : what macroeconomic policy should follow the programme? ”. intervencao do governador carlos da silva costa na conferencia “ consensus e reforma institucional ” address by governor carlos da silva costa at the “ consensus and institutional reform ” conference ( portuguese version only ). bis central bankers ’ speeches domestic payments were it not for the assistance of international institutions. we have embarked on an adjustment process through a contractual relationship with those who came to our assistance. at corporate level, this situation is analogous to what happens when a company falls into difficulties and has to negotiate a restructuring plan with the bank. there are conditions and targets to fulfil that form part of the relationship of trust between the party supplying the financial assistance and the party receiving it. we are making an adjustment under very different conditions from those in force in previous financial assistance programmes, in 1977 and 1983, both in terms of the institutional framework of macroeconomic policy and in terms of the productive and financial structures. but the greatest difference arises from the starting point, which is far more unfavourable in the recent case. aside from this, the external imbalance adjusted in line with that observed in previous programmes ( figure 1 ). this development is notable, as it took place without recourse to the nominal devaluation of the exchange rate and with fairly low growth in external demand. although exports did not grow as much as in previous adjustment episodes, they increased market shares. i emphasise here the effort made by portuguese companies in the tradable sector ( including tourism ) in incremental penetration in the markets and in redirecting supply to new markets. in addition, the performance of the effective real exchange rate shows that even in the absence of a nominal exchange rate devaluation, the portuguese economy has shown the flexibility needed to adjust through variation of the relative unit labour costs. this is an important accomplishment for europe as a whole, as it proves that it is possible to make an adjustment in a single currency context. figure 1 comparison with previous financial assistance programmes : external accounts trend effective real exchange rate current and capital account balance ( % of gdp ) ( using ulc ) t - 1 t t + 1 t + 2 - 5 - 10 - 15 t - 1 exports market share t t + 1 t + 2 external demand t - 1 t t + 1 t + 2 t - 1 t t + 1 t + 2 notes : t corresponds to the start year

liabilities ) and tlac ( total loss - absorbing capacity ), which are good ideas for banks that are mainly financed in the market, but do not work as expected for banks essentially dependent on deposits. the latter are obliged to go to the markets and to issue debt with high costs that, in all likelihood, will be taken up by other banks, thus creating negative externalities for the stability and resilience of the financial system as a whole. this is particularly worrying because it can undermine the construction and sustainability of the banking union. 2 / 3 bis central bankers'speeches 4. financeable risk and risk that is acceptable to society banks take risks as part of their normal activity. however, when such risks are excessive they can lead to huge losses – not only for banks and their investors, but for the whole economy. regulation plays a key role in reducing vulnerability and sources of risk and in containing the costs of financial instability when it arises. nevertheless, it should be taken into account that the higher the capital required for the banking system, the higher the intermediation cost, decreasing the credit multiplier. a banking system with minimum risk means a banking system with maximum cost and, hence, smaller capacity to finance investment. if it is accepted that the financial system has to take some risk, regulations must lay down how society should react when risk becomes systemic, for instance, setting out the role of the different stakeholders in these cases. regulations should seek to make the financial system safer, but flexible enough to fulfil its function as a driver of economic development while being adaptable to new paradigms, namely to those resulting from technological innovation. society ’ s preferences in terms of financial security are not always consistent with the economy ’ s financing needs or risks arising from innovation. i will stop here, resisting the temptation to keep talking about these important and fascinating issues related to the regulatory and supervisory institutional frameworks in europe. let me just wish you a rich and fruitful debate and a very pleasant stay in sintra. thank you for your attention. 3 / 3 bis central bankers'speeches