international ramifications should be equally ambiguous if moral hazard is to be avoided. 48 in any event, liquidity a new but unwelcome form of ambiguity has emerged in the context of the asian crisis. the short - term liquidity requirements of a number of countries have been so great as to call into question whether the fund had adequate resources to restore confidence on the part of private creditors. for example, as of july 1996 the - 17 - support from the international monetary fund to sovereign borrowers must continue to be firmly linked to conditionality and the adjustment of domestic policies. moreover, support should be provided in such a way as to insure that all the parties whose behaviour contributed to the crisis ( both debtors and imprudent creditors ) pay some part of the costs. as for liquidity support to internationally active banks, the g - 10 governors have agreed that such support should be provided in the first instance by the homecountry authorities. however, this decision still leaves unclear whether the home authorities will be prepared to do so. the willingness of the bank of england to allow baring brothers to fail is a welcome indicator of this ambiguity. what is also unclear is the extent to which other national authorities might act to support the home authorities in different circumstances. the 1996 agreement between the federal reserve and the bank of japan, under which the bank of japan could obtain dollar funds through repo arrangements, gives some indication of the possibilities in this regard. given the scope, increasingly wide participation and regularity of the meetings which take place in basle, the bis makes an important contribution to international financial stability by ensuring that policy - makers ( at least central banks and other regulators ) know each other well and have open lines of communication. this is the institution ’ s most important contribution to crisis management, although not its only one. the international community ( in particular the central banks of the g - 10 countries ) have often found it appropriate to provide bridge loans through the bis to countries in financial difficulties which are awaiting the receipt of funds from the imf, the world bank or other such bodies. such bridge loans often provide needed liquidity, are an indication of international support for the policy changes normally associated with fund programmes, and ensure a continuing central bank involvement in the process of crisis management. while this role might be thought less important in the future, given that the fund can now disburse much more rapidly than before thanks to the new emergency financing mechanism, some possibilities still remain open

do with the instruments used in the pursuit of those objectives. let me elaborate. the macro - prudential objective can be defined as limiting the costs to the economy from financial distress, including those that arise from any moral hazard induced by the policies pursued. one could think of this objective as limiting the likelihood of the failure, and corresponding costs, of significant portions of the financial system. this is often loosely referred to as limiting “ systemic risk ”. in contrast, the micro - prudential objective can be seen as limiting the likelihood of failure of individual institutions. again, loosely put, this means limiting “ idiosyncratic risk ”. so defined, this objective is in turn probably best rationalised as a means of protecting depositors. an obvious implication is that the macro - prudential dimension focuses on the risk of correlated failures, pays great attention to those characteristics of an institution, such as size, that determine its significance for the economy, and regards peer - group analysis as less relevant, or potentially misleading, unless tied to an institution ’ s systemic role. after all, deviations from average behaviour assume that the average is correct. the micro - prudential dimension, by contrast, considers each institution in its own right, is thus not concerned with correlations per se and views peer - group analysis as a natural monitoring tool. to bring out the contrast, think of the financial system as a portfolio of securities, ie the individual institutions. the macro - prudential perspective would focus on the overall performance of the portfolio ; the micro - prudential vision would give equal and separate weight to the performance of each of its constituent securities. compare, for instance, the solvency standard that might be appropriate from a macro - prudential perspective with that which would be consistent with the micro - prudential objective i have sketched. by solvency standard i mean, for simplicity, a target probability of insolvency. first, the macro - prudential solvency standard for individual institutions would be calibrated with reference to their systemic significance ; its micro - prudential counterpart would be uniform for all. second, the macro - prudential standard for the system as a whole would be derived from a top - down approach, based on a view of the likelihood and costs of a systemic crisis. this, in turn, would inevitably imply a judgement about the possible correlation of financial difficulties among institutions. the corresponding micro - prudential standard would be derived