8  This tendency of financial systems towards boom-bust cycles goes back, for example, to the work by Minsky (1977), “A theory of systemic fragility”, in Altman and Sametz, Financial Crises, Wiley. Notably, observers from the Bank for International Settlements, such as Bill White and Claudio Borio, warned before 2007 that such imbalances were building up. 9  For example, Gorton (1988), “Banking panics and business cycles”, Oxford Economic Papers, 40, observes that most US banking crises during the national banking era could have been predicted with a simple business cycle model. 10  See, for example, Acharya, Pedersen, Philippon and Richardson (2009), “Regulating Systemic Risk”, in Acharya and Richardson (eds. ), Restoring Financial Stability: How to Repair a Failed System, Wiley; Lo (2008), “Hedge Funds, Systemic Risk, and the Financial Crisis of 2007-2008”, Written Testimony prepared for the US House of Representatives, Committee on Oversight and Government Reforms, Hearing on Hedge Funds, November. 11  Basel Committee on Banking Supervision, “Comprehensive response to the global banking crisis”, press release, 7 September 2009. 4  BIS Review 115/2009  system and potentially to a financial crisis. It would have to pay attention to the sources of the three forms of systemic risk discussed earlier – contagion, imbalances and macro shocks. Risk monitoring should identify sources of risks and vulnerability coming from within the financial system – i.e. stemming from financial institutions, markets or market infrastructure – and also those present in the macroeconomic environment and non-financial related events.

If a task of this kind had been carried out by an independent and impartial body before the crisis, it could have signalled growing vulnerabilities in EU countries. Risk warnings about fragilities related to foreign currency lending, about particularly highly leveraged sectors in some countries, or overvaluation in a number of EU housing markets could have been louder. I would add, though, that none of these elements triggered the financial crisis – rather, they intensified it as the crisis spread to the EU financial system. The crisis also calls for improved coordination and cooperation between the international bodies responsible for safeguarding financial stability at all levels of the analysis. Cooperation between the ESRB, the Financial Stability Board and the IMF, for example, will probably be fruitful in the future, helping to raise awareness of growing vulnerabilities at global level that could not surface as prominently in an EU-focused financial stability surveillance exercise. Cooperation in the risk detection and risk assessment tasks would involve, for example, sharing of technical expertise and of findings from market and policy intelligence efforts. In addition, the ESRB may use these international bodies as a sounding board for its risk assessments, risk warnings and policy recommendations. An ESRB with an EU-wide focus established prior to the summer of 2007 would not have had access to the stepped-up co-operation at global level or to the wealth of information and analysis on the global environment that should be at its disposal as soon as it starts functioning in 2010.