tommaso padoa - schioppa : reflections on recent financial incidents luncheon speech given by mr tommaso padoa - schioppa, member of the executive board of the european central bank, at the third joint central bank research conference on risk measurement and systemic risk, basel, 8 march 2002. * * * introduction i am delighted to have this opportunity to meet this distinguished group of experts and former colleagues that has come together here in basel to study issues related to financial stability. i would like to share with you a few thoughts, inspired by the two recent cases of enron and argentina, respectively the largest - ever corporate and sovereign defaults we remember. like many observers, i will try to identify whether the two cases raise any fundamental questions concerning the functioning of the financial system and the interplay between market forces and public authorities. i started my career as a central banker some 35 years ago, when public intervention in the economy, and particularly in the financial sphere, was very pervasive. almost all business activities by banks required a specific authorisation, and many actions were simply forbidden. market participants had little room for free and innovative action. it has taken a long time for the pendulum of ideas, economic realities and policies to move towards market forces. public intervention has been gradually scaled back, from having an excessively wide scope to a narrow one, carefully targeted at market failures. this long shift – which has accidentally coincided with the span of my professional life, and to which both my actions and my convictions have fully adhered – has produced extraordinarily large efficiency gains from which our economies have greatly benefited. enron and argentina can undoubtedly be looked at from various angles, and only time will clarify the lessons we have learnt from the two cases. one question we can ask today is : do enron and argentina indicate that the pendulum may not be very far from swinging back again, between the two extremes of very pervasive public intervention and complete laissez - faire? is it time to reconsider – with some historical perspective – what public intervention is needed to best support the orderly functioning of financial markets? without pretending to provide full answers to these questions, let me just offer a few thoughts. risks in the financial sector i start with two observations about the origin and propagation of risks. first, although the increasing complexity of the financial system renders it more and more difficult to identify the origin of risks, we should never forget that the threat

give you my views on the significant issues, and the questions i believe deserve further study. i also want to emphasize how important it is for those of us charged with monetary policy implementation to seek broad engagement on these issues, particularly in our effort to better understand how our money markets function and how best to implement monetary policy in these markets. motivation and background why should we think hard about issues related to monetary policy implementation? after all, central banks could always go back to the frameworks they used before the crisis. in the case of the federal reserve, the pre - crisis framework worked well at targeting the federal funds rate and we have high confidence that a similar system could work again in the future. but can we do better? 4 in light of recent experience and changes, are there more effective, transparent, or flexible implementation frameworks that would give policymakers capacity to better steer the economy in the direction they need to satisfy their mandate? recent experience suggests that the federal reserve ’ s new tools – interest on reserves and term deposits5 – as well as its application of old tools towards new purposes – fixed - rate reverse repos and large - scale outright security purchases – can be very helpful, but we can probably still learn more about how best to employ them. we can benefit collectively from studying the impact of differences in the implementation of similar tools across central banks. 6 an extended effort to evaluate potential long - run monetary policy implementation frameworks was announced in the july 2015 fomc meeting minutes. for example, some have suggested that the federal reserve could target a repo rate, rather than the federal funds rate ( see bernanke, or gagnon and sack ). targeting a repo rate could have some benefits, but may entail a number of complications, so more work would be necessary to evaluate the potential consequences of such a change. although the federal reserve only recently introduced these instruments, versions of interest on reserves and term deposits are standard components of some other central banks ’ implementation toolkits. for example, there is much to learn from the experience of the central banks that have implemented negative rates recently. it is important to note that, with the exception of the swiss national bank, the implementation of bis central bankers ’ speeches for example, “ quantitative easing, ” known shorthand as qe, originates with the bank of japan ’ s ( boj ) efforts to stimulate inflation in the early 2000s at the zero bound. in this effort, they targeted the money base and conducted temporary