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

proposals in this domain. one important objective is to re - align incentives in the financial sector from an excessive focus on short - term profits towards more “ socially useful ” activities that include reducing systemic risk and encouraging the creation of long - term wealth. finally, i will comment on some “ new ideas ” that may contribute to this aim. 1. the policy response to the crisis in the financial crisis, monetary authorities intervened to address liquidity issues and government authorities intervened to address solvency concerns. these complementary roles were clearly established long ago. however, it is generally agreed that the recent crisis somewhat blurred this distinction in practice. as a central banker, i will begin by reviewing the response of the monetary authorities. 1. 1 central bank policy response the financial crisis initially appeared in august 2007 as a sudden shortage of liquidity in the money market. traditionally, central banks monitor the functioning of this market very carefully, because it is here that monetary policy is implemented through regular refinancing operations. this is why the eurosystem was the first to respond with massive liquidity injections. the decline of asset prices reduced the value of complex structured finance products, which were widely disseminated across the banking sector. it suddenly became difficult to find a buyer for these instruments. as trading volumes collapsed, it also became difficult to value these assets accurately because prices were no longer observed on the market. uncertainty increased dramatically and banks began to view each other with suspicion as they realised that individual exposures were not transparent. as the inter - bank market dried up, banks found themselves hoarding cash to rebuild their liquidity buffers. this induced them to tighten credit standards, posing the risk that they might cut back loans to firms and households, transmitting the financial crisis to the real economy. in mid - september 2008 the collapse of a major financial player set off a global financial panic. given the severe downturn in the euro area economy and receding inflationary pressures, the governing council of the european central bank responded by rapidly lowering interest rates to 1 %, a historical low for the euro area countries in the post - war period. in addition to standard monetary policy measures, the eurosystem introduced a policy of “ enhanced credit support ” intended to limit the role of liquidity in the propagation of the crisis, to maintain the transmission of interest rate decisions, and to enhance the flow of credit to the real economy. these extraordinary measures lead to a doubling of the central bank balance sheet in the euro area and an