jean - claude trichet : remarks on the financial turmoil speech by mr jean - claude trichet, president of the european central bank, at the british bankers association ’ s annual reception, european parliament, brussels, 8 december 2008. * * * ladies and gentlemen, let me begin by thanking mep purvis and ms knight for the opportunity to address such a distinguished audience and to share my remarks on the financial market turmoil. i need not emphasize to this audience just how extraordinary and challenging current times are ; but i would like to emphasize that the response of central banks and governments to address these challenges have been equally extraordinary. in my intervention today i will focus on the decisive and resolute actions taken by public authorities to support the functioning of the financial system in the wake of the very difficult developments following the intensification of the financial crisis that occurred mid - september, i will also take the opportunity of speaking before you, to stress the important role that the financial industry has to play in this respect. indeed, the failure of lehman brothers in september triggered an unprecedented deterioration in the degree of confidence in the banking sector which ran the risk of undermining its fundamental function of financial intermediation. in europe, this was reflected in record increases in overnight interest rates, especially for us dollar funding, and a marked decline in traded volumes, in both interbank and swap markets. some banks were even " locked out " of the money market completely. in addition, strong declines in banks'share prices and large increases in banks'cds spreads were observed. these developments required a prompt and extensive set of actions to be coordinated across countries and public institutions. with hindsight and drawing on my personal experience in those very intense coordination efforts, i can say that the overall response by governments and central banks was effective in preventing further deterioration in market conditions. with particular reference to the experience in the eu, in addition to the long - established cooperation among central banks, the coordinated approach for government measures to support the banking sector should be highlighted. the agreement by the heads of state of the euro area member states on 12 october, subsequently endorsed in the european union summit were key events in endorsing an action plan at the highest political level. these summits were very important milestones because they demonstrated the high degree of commitment and responsibility of public authorities to act decisively and in a unified manner to preserve confidence and proper financing conditions for the economy. i should also underline the very effective coordination which prevailed between governments and

of banks. however, significant challenges remain as money market activity continues to be abnormally limited. second, governments in a concerted and coordinated manner granted guarantees on new issuances of bank debt. the aim of this measure is to address funding problems of liquidity constrained but solvent banks. the granting of government guarantees on bank debt should facilitate the distribution of liquidity in interbank money markets, particularly by reducing globally the uncertainty on counterparty risk and by increasing the volume of tradable collateral in the private interbank market. the eurosystem contributed to this endeavour by proposing a set of recommendations on the appropriate framework for the granting of government guarantees. these included recommendations on overarching objectives as well as on parameters of the pricing system. from our perspective, such a framework should aim at : solving the funding problems of solvent but liquidity constrained banks ; preserving the level - playing field among financial institutions, avoiding market distortions ; and ensuring consistency with the management of liquidity by the eurosystem and with its operational framework, so as not to impair the implementation of the single monetary policy. banks have recently begun to make use of this funding opportunity. the current outstanding volume of government guaranteed unsecured bank bonds in europe amounts to €24 billion, of which €15 billion have so far been issued by the uk banks. more banks have already indicated their intentions to issue similar bonds this year. the issuances have been considerably oversubscribed and spreads of these government guaranteed bonds are lower than for secured bonds from the same country with a comparable maturity. thus this initiative is effectively representing a viable and less costly source of funding. the recapitalisation of banks government measures in this context should mainly be designed to strengthen the capital position of fundamentally sound banks, with the aim of improving the functioning and stability of the banking system and fostering an adequate flow of credit to the economy. member states have committed to providing banks with additional capital resources, by acquiring equity in the form of ordinary shares, preferred shares or other hybrid instruments such as subordinated debt. also in regard to these measures, the eurosystem has contributed with a set of recommendations on the main features and pricing of different forms of capitalisation instruments. these recommendations are without prejudice to guidance from the european commission aimed at avoiding distortions in competition in accordance with state aid rules of the treaty. in this context, the eurosystem considers that any recapitalisation should take into consideration the specific market situation of each