involved, on the long run, between inflation and growth. that robust, and commonly shared analytical background on what monetary policy could – and could not – achieve was essential in establishing the primacy of price stability and the legitimacy of independence in monetary policy making. we are very far away from such a theoretical agreement on the causes of financial instability, on the real trade - offs between efficiency and stability in finance, on the role of innovation and, finally, on the origins and detection of asset and credit bubbles. it would therefore be illusory, and dangerous, to expect that a precise mandate for financial stability could be defined, let alone quantified, in a foreseeable future. the situation is therefore somehow confusing and this raises important challenges for the future. at the risk of oversimplifying, central banks associated with – or responsible for – financial stability may find themselves with : two separate missions : price and financial stability two different accountability regimes : full independence for monetary policy ; coordination or subordination mode for financial stability two interacting sets of instruments : interest rates and macro prudential tools ( a situation made even more complicated when unconventional monetary policies are implemented ) the potential for confusion is real. it is not difficult to imagine situations where actions that central banks take on pure monetary policy grounds are nevertheless contested in the name of financial stability. to some extent, this has always been a possibility. the difference, now, is that institutional frameworks exist through which – implicit or explicit – challenges to central banks operational independence can materialize. it might be tempting to conclude, then, that central banks should stay away from financial stability and concentrate exclusively on ensuring price stability. this, unfortunately, is impossible, if only for reasons that charles goodhart has well explained in a previous paper : ultimately, central banking is about providing liquidity and liquidity provision is an essential and central component of financial stability. what can we conclude? first, central banking is not only about monetary policy but also involves an essential component of financial stability. this seems to me a broad consensus coming out of the crisis. bis central bankers ’ speeches second, monetary policy is about setting interest rates, but also involves observing and analyzing leverage and liquidity. monetary aggregates as well as the volume and modalities of maturity transformation reveal very useful information on the transmission mechanism. this is actually the conventional wisdom within the eurosystem, through the use of the second pillar. although less acceptable outside the euro area, i conjecture that the

we maintain our reputation, and the credibility that goes with it, as a sound and well - regulated financial services centre. to this end, the institutional links between the bank, the mfsa and the ministry of finance could be strengthened further in the light of the experience provided by the global financial crisis. malta, moreover, is one of two euro area member states where the central bank is least involved in the conduct of banking supervision. although the means already exist for exchanging views and information, it could prove mutually beneficial for the bank and the supervisory authority to seek to deepen the level of existing cooperation. as for our capacity to manage any eventual financial crisis, the domestic standing group was set up in 2007, chaired by the deputy governor and comprising senior representatives from the bank, the mfsa and the ministry. as in other eu countries, a crisis simulation exercise was held soon after to test communications between the parties, co - ordinate decision making and manage potential conflicts of interest. useful lessons have been learnt. another important problem area highlighted by the crisis, and which is also relevant for malta, relates to cross - border issues. foremost among these is the co - operation between the home and host regulators. in this regard, the spirit underlying the memorandum of understanding on co - operation to safeguard cross - border financial stability signed last june by eu central banks, regulators and ministries of finance, now needs to be translated into clear modalities for effective cooperation. in particular, it is essential from malta ’ s point of view that the presence of subsidiaries of cross - border banks that are systemically important to a host country be given due weight in determining participation in the college of supervisors. international experience has also shown that state intervention may be necessary to resolve problems in the financial sector. the state is often the only entity in a democracy that has the political legitimacy, financial strength and credibility to support ailing institutions and, hence, restore confidence in the financial system as a whole. in extreme situations, which require the injection of public funds, the cost to the public purse can be very high. this is an additional reason why maintaining fiscal discipline in the shape of balanced budgets over the economic cycle is important. this would allow a buffer to be built up that could be used in exceptional situations if required, without jeopardising the sustainability of public finances. finally, safeguarding the health of the financial sector in these challenging times also calls for prudent behaviour on the part of the market players themselves