conduct sound economic policies and accumulate adequate reserves. this leads to the paradoxical situation that unconventional measures applied in a crisis might lower the incentive to maintain preventive measures during normal times. in turn this increases the likelihood that unconventional measures will be needed again in the future, i. e. crisis resolution might tradeoff with crisis prevention. these moral hazard considerations are a well - known problem whenever insurance is provided in a context of asymmetric information. their negative effects can be mitigated to a certain extent. for instance, appropriate pricing of foreign currency liquidity provision can limit its function to that of an emergency backstop facility which is costly for banks to use. additionally, the framework has to be in line with global economic objectives, such as price stability, balanced growth and efficient international allocation of resources. • policies that preserve price stability in the long term should also ensure stability of the financial system. however, in short term these two objectives might appear to conflict. even when liquidity in domestic currency is provided to another country, it might find its way back to the domestic economy and contribute to inflationary pressure, if not sterilised. • a buildup of national reserves might itself contribute to systemic instability. a reserve framework requires stability of the reserve currency in order to act as a global store of value and an anchor for price stability. however, the triffin - dilemma notes that the accumulation of reserves implies persistent current account deficits of the reserve - issuing country. this potentially creates instability and fuels global imbalances. moreover, such a reserve system aggravates interdependence between the reserve accumulating countries and the reserve - issuing country. for instance, the us treasury market relies largely on demand from emerging market central banks. this dependence is likely to increase as the federal reserve phases out its asset purchase program, reducing us demand. • this is connected to potential negative side effects of reserve accumulation or intervention in foreign exchange markets. in consequence, it can distort exchange rates and prices of other assets and might be difficult if not impossible to disentangle from its benefits. • finally, an acceptable solution from the country perspective might not appear desirable from the global perspective. for instance, excessive accumulation of foreign exchange reserves might distort international capital allocation. this leads me to the general conclusion that there are many practical obstacles to a first - best solution for foreign exchange reserve provisioning. ultimately, i will conclude with some considerations on the challenges facing the global framework for

their foreign exchange reserves. another source of global liquidity consisted of large interest rate differentials between major economies, which encouraged investors to engage in carry trade transactions in foreign exchange. short - term risks to consumer price stability are currently dampened by a drop below potential in most economies and rising unemployment. however, the situation can change abruptly. one should not underestimate the risk of prolonged excess liquidity on unwelcomed developments in specific asset classes. global excess liquidity also reduces investors ’ willingness to hold liquidity at the current low level of returns and might fuel their risk appetite. this could provide a renewed chase for performance. recent experience indicates that even in a situation of abundant global liquidity, local markets in foreign currencies can seize up and currency shortages swiftly propagate across currencies, international markets and time zones. this highlights the importance of the global liquidity provisioning concepts to counter illiquidity of particular markets. in a liquidity crisis, monetary authorities can engage in foreign currency liquidity - providing operations which can be classified into the following four major concepts : national foreign exchange reserves, pooling of reserves, inter - central bank swap lines or repos and monetary units or loan facilities by supra - national monetary authorities. central banks maintain foreign reserves mainly in key currencies but also in high - value liquid assets like gold. they may redirect the investments of such foreign reserves towards bank deposits, in an endeavor to offset the withdrawal of bank deposits in foreign currency by investors. at the outset of the crisis, global foreign exchange reserves had reached an unprecedented euro 3. 5 trillion ( usd 5 trillion ) compared to only euro 2. 3 trillion ( usd 2 trillion ) in 2001. the share of asian countries more than tripled during that period and china alone now holds reserves worth about euro 1. 7 trillion ( usd 2. 4 trillion ). another possible strategy to ward off potential future currency crises ( proper exchange rate regimes and exchange rate management notwithstanding ) consists of schemes that pool foreign reserves of several central banks. this concept generally requires a binding arrangement between sovereign states specifying the pooling mechanism and its management. in may 2009 the chiang mai initiative of the asean + 3 group agreed to transform its network of bilateral currency swap agreements into a multilateral facility that would pool together euro 85 billion ( usd 120 billion ) of reserves. so far, these arrangements have never been called upon. an additional source of reserve currency can be inter - central bank