of banking sector development, by providing the entire necessary both financial and regulatory infrastructure. the close cooperation between the cbk and the banking sector, facilitated to a great extent by the kosovo banking association, has allowed us to effectively address the needs for developing and maintaining the sector ’ s stability and we are therefore committed to further advance our constructive cooperation. faqe 5 nga 5

institution, after a foreign depositor run that followed heavy losses. one concern arises from the effects on incentives of bank creditors and, possibly, the banks themselves. creditors who believe that an institution will be regarded by the government as too big to fail may not price into their extensions of credit the full risk assumed by the institution. that, of course, is the very definition of moral hazard. thus the institution has funds available to it at a price that does fully internalize the social costs associated with its operations. the consequences are a diminution of market discipline, inefficient allocation of capital, the socialization of losses from supposedly market - based activities, and a competitive advantage for the large institution compared to smaller banks. the management and shareholders of the too - big - to - fail institution may, in turn, regard themselves as holding a kind of put option and may thus be motivated to take greater risks the views expressed here are my own, and do not necessarily reflect those of other members of the board of governors of the federal reserve. with the cheaper funds now available to them. if the risky projects pay off, the shareholders profit famously. if the results are bad, the government may keep the institution afloat, thereby preserving at least some value for shareholders. the roots of the present crisis – and thus of the current form of the too - big - to - fail problems – reach much deeper than the breakdown of private risk management and shortcomings of government regulation during the first part of this decade. its origins lie in 30 years of change in the organization of financial firms and markets that squeezed the traditional business model of commercial banking. the regulatory system accommodated the growth of capital market alternatives to traditional financing by relaxing many restrictions on the type and geographic scope of bank activities, and virtually all restrictions on affiliations between banks and non - bank financial firms. the result was a financial services industry dominated by one set of very large financial holding companies centered on a large commercial bank and another set of very large financial institutions not subject to prudential regulation. many firms of both types relied for a considerable portion of their financing on short - term capital market sources that were often poorly matched with the maturity structure of a firm's assets. securitization markets were a major part of these complex, tightly wound financial arrangements. when questions arose about the quality of assets held by the borrowing institutions, a classic adverse feedback loop ensued. with lenders increasingly unwilling to extend credit against these assets,