issue may be complicated by the fact that there could be a negative feedback loop from financial instability to macroeconomic instability, which in turn feeds back to the financial sector. central banks potentially have conflicts of interest, being at the same time a participant and regulator of financial markets. banks that are supervised by the central bank are often also counterparties. this has the potential of complicating decision making, unless properly governed. i am sure that this is not a major issue affecting the role that central banks play in maintaining financial stability : it is generally well managed and control through segregation of duties and firewalls between operational, supervision and policy departments or divisions. however, it is something that central banks should remain sensitive to and manage diligently. 5. other role players in all of their activities, central banks have to be very sensitive to changes in the structure and functioning of the financial markets. these changes take place on an ongoing basis, and a trend normally becomes visible only after it has progressed fairly significantly. one such change that is occurring is the bigger role played in global financial markets by a number of new players, in particular sovereign wealth funds ( swfs ), private equity funds and hedge funds. the role of swfs in the current crisis is particularly of note, and it is also interesting to see how the activities of these funds occurred complementary to those of central banks. sovereign wealth funds appear to have played a stabilising role during recent times, alleviating capital constraints and absorbing some of the market volatility. these institutions contributed usd41 billion of the usd105 billion capital injected into major financial institutions since late 2007. there are several factors that facilitate the ability of swfs to act as a stabiliser in times of market stress. these include the fact that they have a long - term investment horizon and limited liquidity needs and they have a stable funding base and no capital adequacy or prudential regulatory requirements that could force it to liquidate positions. however, the long - term impact and the potentially stabilizing role of swfs as major institutional investors will require a broader set of data and assessment, and you may well be aware that some swfs are regarded with quite a bit of suspicion as regards their long - term motives for investment. a number of other institutions also played important roles during the current turmoil, and several initiatives were announced to improve regulations and enforce disclosures, aiming to restore and improve financial stability. at the national level, the

deal with the breakdown of standard distribution channels for liquidity, both nationally and internationally. this was because the provision of sufficient liquidity to a small group of intermediaries no longer guaranteed that it would either flow through the system, or to those in need of funding in specific currencies, as stress in money markets spread to foreign exchange swap markets. secondly, some banks lacked direct access to open market operations ( omos ), either because they did not belong to the list of eligible counterparties, or lacked the eligible collateral. finally, central banks had to project liquidity demands at different time horizons, as demand patterns changed rapidly and unexpectedly, and the impact of factors such as year - end effects became increasingly unpredictable. the decision by central banks whether or not to provide additional liquidity to markets and to bail out failing banks has its own set of complexities. clearly central banks have to be concerned about systemic risk. the provision of overall liquidity is probably more clear cut, as such provision is generally done against appropriate collateral, although this requirement was relaxed in a number of instances. with regard to bailing out failing banks, there are more difficult issues. firstly, there is the issue of moral hazard to consider. should a central bank under all circumstances bail out a bank – even when it has been mismanaged? how does the central bank ensure that its lender - of - last - resort assistance doesn ’ t result in excessive risk taking and poor risk management by banks? secondly, the issue of timing and the degree of intervention required has to be considered. acting too soon can increase the risk of moral hazard and favour bad firms over good ones. acting too slowly can exacerbate the consequences. the bank of england, for example, was accused of delaying too long in attempting to save northern rock. in my view, there is no such thing as the perfect handling of a bank failure. a bank failure is a financial disaster, and the most central banks can do is damage control. it is a very difficult call to make whether or not to try and save a failing bank, when to intervene and to what extent to intervene. whatever decision is taken is normally criticised by some or other group of stakeholders. in addition, central banks can usually not disclose the information upon which their decisions were based. however, even central banks that focus primarily on price stability sometimes face possible conflicts of objectives. the most obvious one is probably the potential conflict between maintaining price stability and financial stability. the