##gilant in the years that follow the initial burst of reform. o. de bandt and p. hartmann, “ systemic risks in banking, ” in financial crisis, contagion and the lender of last resort, edited by c. goodhart and g. illing, ( oxford : oxford university press, 2002 ). ( http : / / www. olivierdebandt. com / publications _ en. html ). a fully risk - proofed system is neither attainable nor desirable. the point is not to pile up so much capital in our institutions that they are never heard from again, either as a source of instability or of growth. the challenge is to get the balance between resiliency and efficiency right. the global financial crisis exposed the fallacy of composition that strong individual financial institutions collectively ensure the safety and soundness of the system as a whole. even the most vigilant, microprudential regulatory regime can be overwhelmed by systemic risks. as a consequence, policy - makers now recognise that systemic risk is the product of the resiliency of financial institutions, the robustness of systemically - important markets ; and the interconnectedness between institutions and markets. at its heart, the resilience of markets and institutions is a function of solvency and liquidity. 2 as evident in the recent crisis, uncertainty about the solvency of financial institutions causes markets to become illiquid, and illiquid markets can cause otherwise solvent institutions to become insolvent. however, while solvency and liquidity are related, the responsibility for each ultimately falls to different agents. 3 the risk of insolvency should, fundamentally, be a private concern, just as the return is appropriated by private agents. it is the job of regulation to ensure that is the case. on the other hand, liquidity is a social good, as it facilitates exchange between institutions. while individual institutions are responsible for managing their own liquidity to buffer idiosyncratic shocks, and liquidity should be endogenously created by private agents in most states of the world, the ultimate provider of liquidity to the financial system is the lender of last resort – the central bank. but the crisis has revealed that liquidity is not just a central bank ’ s responsibility. it is now clear that a robust financial system requires the co - operation of all financial regulatory bodies, since illiquidity can be triggered by the insolvency of a single institution

peter praet : the role of the central bank and euro area governments in times of crisis speech by mr peter praet, member of the executive board of the european central bank, at the german federal ministry of finance, berlin, 19 april 2012. * * * i would like to thank maximilian freier and gianluigi ferrucci for their contribution in the preparation of this speech. introduction since 2007, we have constantly been confronted with exceptionally tense financial and economic conditions. when the tensions in the financial markets first emerged in the summer of 2007, they were perceived as a liquidity shock. however, the collapse of lehman brothers in september 2008 – the first climax of the crisis – revealed more fundamental fragilities in the global financial system. the accumulated credit excesses, paired with the complex cross - country linkages in the financial markets, quickly exacerbated the financial market tensions on the other side of the atlantic, transforming them into a crisis of global dimensions. the resulting great recession of 2009 affected virtually all industrialised countries and caused other weaknesses in the economic and financial system to be crystallised. specifically, the severe economic contraction worsened the fiscal positions in many countries around the world, particularly in those that already had sustained public or private debt imbalances before the crisis. the subsequent tensions in some sovereign debt markets have spilled back into the financial markets. as safe assets, sovereign bonds play a key role in financial systems. the weakening of this status of being a safe asset in some countries added renewed fragility to financial institutions. five years into the crisis, there remain manifold challenges to global financial and economic stability. the situation continues to be extraordinarily complex, and there are no easy solutions on offer. the exceptional dimension of the crisis – the real threat it presents for the prosperity of the people in europe and around the world – requires a forceful response by national and international authorities. however, several factors are limiting the capacity of authorities to react around to world. most importantly, the weak fiscal positions of many countries are placing severe constraints on the capacity of governments to – somehow – spend their way out of the crisis. in some cases, this has led to calls on monetary authorities to act more. in addressing the crisis, we should not forget that policy responses shape future expectations. we cannot afford to take measures that entail the risk of adverse economic consequences, such as moral hazard in fiscal policies or an unanchoring of inflation expectations. in my