of banking supervision and regulation, and an institution that can act as lender of last resort. to come back to our basic question of whether the liquidity transformation function of banks and the associated instability remains “ special, ” i would say that there is simply no doubt about it. wherever banking panics have occurred, their effects on economic performance have been crippling. thus, developing institutions and mechanisms that can prevent or short - circuit bank panics remains an important and “ special ” goal for economic policymakers. having said this, however, recent experiences in the united states and elsewhere have underscored the importance of going about this task in a way that does not overextend the banking “ safety net. ” in the united states, this lesson was painfully conveyed during the 1980s and early 1990s by the hundreds and hundreds of bank and thrift failures that occurred in these years. while this phenomenon was extraordinarily complex, many have argued that underpriced deposit insurance and relatively lax supervision contributed to the problem by distorting the incentives banks and thrifts faced in assessing the risks of their business decisions. in response, u. s. federal banking agencies have implemented changes that trim the banking safety net somewhat - - for example, by requiring prompt closure of troubled institutions, by applying stricter rules governing the payoffs of depositors and other creditors in bank failures, and by curtailing the practice of allowing regulatory “ goodwill. ” in addition, new bank capital regulations such as the basle risk - based capital standards, which have been implemented in the g - 10 and have served as a blueprint for capital regulation in many other countries, have helped to provide better incentives for banks in their business decisions. to summarize, i would argue that banks remain quite special in their susceptibility to runs and in the severe consequences that a large - scale banking panic would involve today. balancing the need for a banking “ safety net ” to defuse potential bank runs with the need to create the right incentives for banks in assessing and assuming risk is one of the most difficult challenges we face as central bankers. a second way in which banks have been deemed to be “ special ” is in the provision of basic banking services such as credit extension, deposit - taking, and payments processing. there is little question that these functions are critically important throughout society. consumers turn to banks for safe investments such as time and savings deposits, for transactions deposits, for processing payments, and for

for financial institutions and banks in particular. in reviewing the past two decades in the united states, for example, one cannot help but notice that the most severe problems in our banking and thrift industries during the 1980s stemmed from serious macroeconomic imbalances - - including the accelerating inflation of the late 1970s and the costly but necessary steps to reverse that trend in the 1980s. by contrast, macroeconomic policies that encourage sustainable economic growth with low inflation - - like those in recent years - - have a strong positive influence on the overall health of the banking sector and other financial institutions as well.