governing council are clearly separated from other ecb tasks. the governing council ’ s commitment to deliver on its primary mandate must not be put in doubt. at the same time, a successful banking union in the euro area will help crisis prevention in future. it will also be helpful for crisis resolution at present. on both counts swift implementation of ssm and srm would reduce, not increase, the risks of overburdening monetary policy. over the medium term, and in most circumstances, monetary and financial stability are complementary. this also applies to the task of supervision to maintain sound financial institutions. conflicts arise once one or the other objective is put in jeopardy and if appropriate instruments are not in place to achieve the respective objectives. today, most countries have adopted arrangements where possible conflicts are appropriately managed and internalized inside the central banks. what monetary policy can do and cannot do this brings me to the role of monetary policy in times of financial crisis. we need, again, to distinguish three aspects : crisis prevention, crisis management and crisis resolution. on crisis prevention, maintaining an environment of price stability is the best contribution that monetary policy can make to supporting financial stability. the attention paid to money and credit variables in the ecb ’ s monetary policy strategy also helps to take into consideration the build - up of financial imbalances and associated development in asset markets. these in turn can imply risks to both financial stability and price stability over the medium term. 1 on crisis management, in a financial panic there is a legitimate and well - established case for central banks to step in to provide liquidity as a lender of last resort. the well - known principles established by bagehot in the 19th century remain a valuable guidepost : “ lend freely, to illiquid but solvent institutions, against adequate collateral, at a penalty rate ”. while this is easier said than done in practice, these principles remain a salutary reminder of the need to guard against moral hazard in central bank crisis measures. responsibility for crisis resolution lies outside the domain of monetary policy and is up to supervisory and fiscal authorities. more precisely, while the ssm is to be entrusted with the analytical role performed inside the central bank, the srm needs to take the financial and redistributive decisions that belong to the political sphere, when it comes to winding down non - viable banks. more broadly, addressing the root causes of the crisis, both economic and financial, is up to other policy domains, it namely lies in

as an example where government regulation may have adverse consequences on financial markets and monetary policy transmission. i would not like to enter into the case for or against the ftt. bis central bankers ’ speeches reservations are well known, while it is appropriate for us to take a neutral view on the objectives of this measure. looking at the specific ftt proposal published by the eu commission on 14 february, nonetheless attention needs to be drawn to possible negative implications for the implementation of monetary policy and financial stability : • incentives to replace secured market funding ( subject to ftt ) with central bank liquidity ( exempt from ftt ), which may hamper market liquidity and increase banks ’ recourse to the eurosystem funding. • the possible distortion will be largest on the shortest maturities in the secured money markets, i. e. repo market ( given ftt does not take into account maturity ). • reduced liquidity in secondary fixed income markets ( including government bonds ) which may hamper smooth monetary policy transmission and worsen market fragmentation at a time when many of these markets remain fragile. for these reasons a careful impact assessment warranted in these respects and some modifications in the current proposals merit consideration. some decades back, long before the financial crisis, james tobin gave us four definitions of financial market ( in ) efficiency ( in his fred hirsch memorial lecture 1984 ) 2 : 1. information arbitrage efficiency – accepted by tobin in its weak form. 2. fundamental valuation efficiency : do financial asset prices reflect rational expectations of future payment flows? – very much doubted by tobin. 3. full insurance efficiency : do financial markets support pareto efficient, complete markets arrow - debreu allocations? – very much questioned by tobin, since incomplete financial markets interact with inefficient goods and labour markets. 4. finally, tobin proposed a notion of “ functional efficiency ”, i. e. do financial markets and intermediaries provide value to society at large? do they channel savings to the most productive investments, by pooling risk and allocating it to those best placed to bear it? it is this fourth notion ( not much found in our finance textbooks ) that we need to revert to assess the financial system in the wake of the crisis and its service for the real economy. while he was critical of the considerable resources that tended to be devoted to “ churning ”, to “ gambling ” and endogenous, self - referential activities in financial market, he was a lifelong