, london, 1873 ; humphrey, t. “ the classical concept of the lender of last resort ”, economic review, 61, 2 – 9, 1975 ; and freixas, x., parigi b., and j. - c. rochet “ the lender of last resort : a 21st century approach ”, journal of the european economic association, 2 : 1085 – 1115, 2004. bis central bankers ’ speeches fixed - rate, full allotment regime in its refinancing operations, offering unlimited liquidity to banks at a predictable cost against an expanded set of eligible collateral. the widening of collateral might be seen as a way to mitigate the adverse and destabilizing effects of shortterm funding “ runs ” relating to a deterioration of asset liquidity, but it can also be seen as a way to prevent large recourse to central bank liquidity by banks, who would otherwise be subject to funding outflows at a later stage of the crisis. such a widening has to be accompanied by proper risk management measures, such as haircuts, to mitigate the increase of the risk profile of the central bank. the challenge for the central bank is to “ buildin ” the possibility to expand the set of eligible collateral while mitigating the incentives for banks to abuse it. 20 similarly, the lolr ’ s function of providing emergency liquidity assistance has been criticised for provoking moral hazard by banks. indeed, support that is considered as appropriate during the crisis might have perverse effects on the incentives of banks at a later stage. banks may ex ante decide to take an excessive exposure to risk, knowing that the central bank will intervene if that risk materialises. moreover, there is a fine line between liquidity and solvency needs, which in a crisis is often blurred. central banks should therefore be particularly wary not to substitute for capital support that should be provided by shareholders, investors, or in last resort by governments. when such moral hazard problems are severe, the central bank might consider mitigating but not eliminating the externalities of a liquidity crisis – that is, not helping barely solvent banks and thus providing incentives for banks to conduct business in safe and sound manner. 21 the challenge for the central bank is to find the appropriate balance between preserving financial stability and imposing discipline for the future. while the new set of liquidity standards requires banks to hold sufficient liquid assets in good times to meet their out

bank of japan ’ s september report of recent economic and financial developments bank of japan communication, 11 / 9 / 98. the bank ’ s view japan ’ s economic conditions continue to deteriorate. with respect to final demand, public investment seems to have bottomed out. net exports ( exports minus imports ) are increasing mainly due to a decline in imports. however, business fixed investment has been decreasing significantly, and housing investment has declined further. private consumption has not yet shown a recovery despite the special income tax reduction. against this background of weak final demand, production has been reduced substantially. as a result, some industries have shown improvements in inventory adjustments, but the level of inventories is still high as a whole. with the decline in expenditure and production, corporate profits continue to decrease, and the decline of employee income is accelerating somewhat. in addition, the ratio of job offers to applications records a historically low level, and the unemployment rate remains at a high level. as a whole, the employment and income conditions have deteriorated further. as the above indicates, there are continued negative interactions of production, income, and expenditure. given the current considerably low level of economic activities, the economy is unlikely to transit immediately to a self - sustained recovery led by private demand, although a further deterioration in the economy is expected to cease gradually from the effects of the comprehensive economic stimulus package. additionally, attention should be paid to possible negative effects on the real economy from financial developments including the recent fall in stock prices. in these circumstances, the cabinet approved a guideline on budget requests by ministries for fiscal 1999. this guideline intends to stimulate the economy by allocating ¥4 trillion to the special budgetary provision on the condition that the fiscal structural reform act is suspended. in addition, the bills to rebuild the stability of the financial system are being deliberated at the diet, and the reduction exceeding ¥6 trillion in personal income taxes and corporate taxes is expected to be discussed in detail. the materialization of these policies along with their effects on corporate and household sentiment should be carefully monitored. with regard to prices, wholesale prices are on a downtrend, and consumer prices are lowering below the previous year ’ s level. with respect to the outlook, the downward pressure from domestic factors is unlikely to weaken considerably reflecting the already large output gap, despite the expected effects of the comprehensive economic stimulus package. hence, prices are likely to be weak for some time. in the financial markets, stock prices dropped considerably in late august