Financial stability is a situation in which the various components of the financial system - financial markets, payment and securities settlement systems, clearing systems and financial institutions - function smoothly and without interruption, with each component proving resilient to potential shocks. It would certainly be excessive to consider that an increasing risk of financial instability is the price to pay to benefit from the increasing sophistication, interconnection and integration of the world’s financial markets. This assumption remains to be borne  BIS Review 32/2003  3  out. But I would definitively advocate that the greater the interdependence, the greater the risks of contagion, the more we need to methodically and collectively search for ways and means to preclude the risks of financial instability, and prevent crises from spilling over at the global level. By their very nature and position at the heart of the financial system, central banks attach great importance to financial stability: they are responsible for price stability which contributes to financial stability. In turn, a stable financial environment makes it easier to ensure price stability. The involvement of central banks in financial stability is hence rooted in their role as issuers of money. Central banks are also responsible for the smooth functioning and fluidity of financing and settlement channels: this is the reason for their responsibility in the oversight of payment and securities settlement systems, as well as for the responsibility they often have as regards prudential supervision of credit institutions. The creation of the Monetary Union hasn’t altered these responsibilities.

An independent study carried out for the European Commission concluded in November 2002 to a significant macroeconomic positive impact in the long run of a full integration of European financial markets, not only in terms of GDP, but also in terms of business investment and employment. Needless to say, as a central banker, I attach great importance to financial markets integration: the implementation of the single monetary policy would not have been possible without an efficient and fully integrated money market. A high degree of integration of the securities market is also required because central banks’ credit operations are fully collateralised and rely heavily on the smooth transfer of securities. Moreover, efficient and integrated markets favour a homogenous transmission of monetary policy actions across the euro area. So where do we stand today? I think it is fair to recognise that significant progress has been made already in the integration of European Capital Markets. At the same time, one has to acknowledge that integration is an on-going process, that faces renewed challenges in a constantly evolving environment. Let me elaborate on these two aspects successively. 1. European capital markets already exhibit a high degree of integration  If one stands back and compares the organisation, functioning and structure of European financial markets today with the situation that prevailed five years ago, the magnitude of the changes that already took place is striking, not only in the various market segments but also in their infrastructures: indeed, the euro area already benefits from highly-integrated capital markets.