, where rick mishkin introduced the topic. 3 at that time, the prevalent thinking in central banking circles was what professor issing later called “ the jackson hole consensus ”, meaning that it is better for monetary policy only to “ clean ” ( up afterwards ) than to “ lean ” ( against the wind ). after the hard lessons we learned over the last five years the case for benign neglect of asset booms and only picking up the pieces afterwards is not so strong any more. the crisis experience supports rather the idea that financial excesses are better prevented as they happen than only managed after they have caused a recession. this would be the best way to prevent “ downward financial dominance ” which could arise if monetary policy could not effectively counteract credit contraction. unconventional tools and the independence of monetary policy recent experience shows that the central banks ’ box of potential tools is actually very deep, and if it has become necessary to utilize unconventional tools, as in the present crisis, these new tools have been developed and deployed. in the case of the ecb, the new tools have included the transition to full allotment auctions, the long term refinance operations up to three years, widening of the scope of eligible collateral, and the various bond purchase programmes. the most recent of these is the omt programme announced last summer but not yet commenced in practice. the development of new tools has been justified. the slip of the depressed economies to dangerous deflation has been averted, and the debt and banking problems have not developed into systemic financial meltdowns in the affected countries. we have seen that central banks can pursue successful price stability policy also under very difficult conditions. the events around the world since the collapse of lehman brothers are evidence of that. deflation has been avoided despite a severe recession in many countries. however, there are also certain problems with relying on the enlarged toolkit of the central banks. the ability to act in crisis has led to the central banks being even called “ the only game in town ”. we should resist this idea and beware of the danger that problems which are fundamentally political could be pushed to central banks to solve. a division of responsibilities between appointed officials and elected politicians should be preserved. monetary policy cannot administer the needed structural transformation in the real sector of the economy or solve excessive deficit problems of governments. there are situations where the central banks just have to act and do their best to stabilize the economy, even if they would have to use tools which go beyond

erkki liikanen : banking structure and monetary policy – what have we learned in the last 20 years? presentation by mr erkki liikanen, governor of the bank of finland and chairman of the highlevel expert group on the structure of the eu banking sector, at the conference “ twenty years of transition – experiences and challenges ”, arranged by the national bank of slovakia, bratislava, 3 may 2013. * * * how is today ’ s perspective on monetary policy different from what prevailed 20 years ago? twenty years ago, the world of today was being formed in many ways. 1993 was the year when the economic and monetary union project was becoming political reality : the maastricht treaty had been signed and was in the process of being ratified. it was also the time when the mainstream approach to monetary policy was beginning to converge to the flexible inflation targeting framework. a number of countries had then just adopted an explicit inflation targeting strategy. in the sphere of banking regulation, too, a new era was beginning. a significant reorientation was going on, away from regulating the conduct of banks and towards the new risk - based approach. the regulatory trend, based on increased freedom for banks but subject to riskbased capital requirements, would continue all the way to the eruption of the financial crisis in 2008. in the eu, the second banking directive took effect from the beginning of 1993, creating a single market in banking. the directive sought to prevent discrimination and to increase efficiency through competition. there was discussion on the implications of this for supervision, but little action. so, while european banking markets were being integrated, financial supervision remained a national competence. in the u. s., deregulation was also moving forward. for instance the glass - steagall act, separating banking from securities and insurance, was under growing criticism and would be ultimately repealed in 1995. one reason for the dissatisfaction with the glass - steagall system in the us was competition from european banks which were less restricted in what they could do. twenty years ago, the striking improvement in macroeconomic performance, later named “ the great moderation ” by chairman bernanke, was spreading to the whole developed world. the almost surprising success of monetary policy in improving price stability and reducing fluctuations in economic activity, while also keeping interest rates at historically low levels, was interpreted as a major victory for the art of economic policy making. now we know that there was trouble brewing under the surface. the underpinnings of