The experiences with the crisis and the decision to establish a macro-prudential stability function in Europe suggest that, even when building on existing structures, significant efforts are called for in order to extend and further improve models and tools. While it would be desirable for the risk assessment exercise to be increasingly quantitative, it should never become mechanistic or fully model-based. Expert judgement and qualitative assessments will always be crucial to understand the messages coming from various analytical tools, also taking into account overall intelligence efforts. Comprehensive information base Irrespective of their level of sophistication, models need to be fed with the appropriate data in order to produce results that, in addition to their analytical interest, can support policy messages. A comprehensive information base is also key in the risk surveillance phase that precedes the actual risk assessment. This is because the establishment of a wide radar screen supporting rigorous monitoring is only possible if the critical information is available. The current crisis has convincingly shown that a significant part of credit intermediation was channelled outside the banking sector and the regulated financial sector. The non-regulated or “shadow” banking system was almost totally off any surveillance radar screen. Not enough was known about special investment vehicles, conduits, securitisation markets and instruments, or about all the financial intermediation that takes place outside the traditional banking system. Moreover, little was known about the direct and indirect exposures between this shadow banking system and the regulated one, which turned out to be substantial.

I’ll ask why the communications about the risks that built up were insufficient to prevent the crisis. The fourth part is a what if? What if the Risk Board had existed in the early 2000s – could the factors that led to the crisis have been identified and averted? The answer should point to some of the key advantages of (and reasons for) the EU’s new macro-prudential function. 1. The setting-up of the European Systemic Risk Board  The idea of establishing a body to monitor and assess systemic risk at European level was first mooted in the late 1990s. 2 It took over a decade and a financial crisis to implement it. Let me recall the milestones of the setting-up of the ESRB institutional framework. Following the recommendations of the de Larosière Report, in February this year, the main features of the institutional framework for macro-prudential supervision were defined by the Communication published by the European Commission on 27 May as well as the Conclusions approved by the ECOFIN Council on 9 June and by the European Council on 18 and 19 June. The European Systemic Risk Board will be responsible for the macro-prudential oversight of the financial system within the European Union. It will seek to prevent or mitigate systemic risks within the financial system, so as to avoid widespread financial distress, and it will contribute to a smooth functioning of the Internal Market and ensure a sustainable contribution of the financial sector to economic growth.