the prices to banks of government deposit guarantees, or of access to the safety net more generally, do not, and probably cannot, vary sufficiently with risk to mimic market prices. the problems that arise from the retarding of the pressures of market discipline have led us increasingly to accept supervision and regulation that endeavors to simulate the market responses that would occur if there were no safety net, but without giving up its protections. to be sure, we should recognize that if we choose to have the advantages of a safety net and a leveraged system of financial intermediaries, the burden of managing risk in the financial system will not lie with the private sector alone. with leveraging there will always exist a remote possibility of a chain reaction, a cascading sequence of defaults that will culminate in financial implosion if it proceeds unchecked. only a modern central bank, with its unlimited power to create money, can with a high probability thwart such a process before it becomes destructive. hence, central banks will of necessity be drawn into becoming lenders of last resort. but implicit in the existence of such a role is that there will be some form of allocation between the public and private sectors of the burden of risk of extreme outcomes. thus, central banks are led to provide what essentially amounts to catastrophic financial insurance coverage. such a public subsidy should be reserved for only the rarest of disasters. if the owners or managers of private financial institutions were to anticipate being propped up frequently by government support, it would only encourage reckless and irresponsible practices. in theory, the allocation of responsibility for risk - bearing between the private sector and the central bank depends upon an evaluation of the private cost of capital. in order to attract, or at least retain, capital, a private financial institution must earn at minimum the overall economy ’ s rate of return, adjusted for risk. in competitive financial markets, the greater the leverage, the higher the rate of return, before adjustment for risk. if private financial institutions have to absorb all financial risk, then the degree to which they can leverage will be limited, the financial sector smaller, and its contribution to the economy more limited. on the other hand, if central banks effectively insulate private institutions from the largest potential losses, however incurred, increased laxity could threaten a major drain on taxpayers or produce inflationary instability as a consequence of excess money creation. thus, governments, including central banks, have been given certain responsibilities related to their banking

of other sectors in its year 2000 preparations, uncertainties will remain with regard to the readiness of systems both internal and external to all organizations. it is the responsibility of every individual private sector firm to resolve its year 2000 problems. public sector policymakers and regulators have an important role to play in fostering appropriate actions by market participants and working to achieve the proper coordination between the various authorities involved, within the financial sector as well as at the national level. during these past eight months, we have identified four critical themes common to successful year 2000 programs in both the private and public sectors. first, while much productive work has been carried out around the world to adapt systems that need to be remediated, we need to avoid complacency and continue to maintain a high degree of attention at the most senior level. senior management and the boards of directors in the private sector must continue to allocate sufficient human and financial resources. senior executives should be fully aware of their firm ’ s dependence on third - party vendors, service providers, customers, counterparties, and public infrastructures and also of the subsequent risks these dependencies pose. the public sector should encourage financial market participants to continue to devote the maximum senior management attention and priority to this critical issue. second, enhanced information sharing is critical to readiness efforts and to avoid unnecessary uncertainty in financial markets. in many countries, there is currently a lack of adequate information on year 2000 readiness. this is of concern because it impedes efficient preparations by market participants and may exacerbate negative perceptions in the marketplace. financial institutions should share information in order to strengthen confidence that the year 2000 challenges are being met in all financial sectors worldwide. in some countries, regulators have mandated public disclosure, such as requiring regular report filings that are made public. regulators can also play a constructive role in making sure that the year 2000 information that they disseminate to the public is factually accurate, balanced and broadly disseminated. third, comprehensive contingency strategies should be developed in order to minimize disruptions. it is important that individual firms review their current business continuity plans and evaluate them in light of possible problems arising from the year 2000 transition. regulators should develop and implement appropriate contingency plans in order to prepare for possible disturbances relating to the millennium transition. the council plans to publish in the near future policy papers on contingency planning for individual financial institutions and for individual regulators. government agencies should encourage telecommunication, utility, and other infrastructure service providers to share