The second pillar consists of a wide range of economic and financial indicators: stock and bond prices, housing prices, exchange rates are also analysed in depth. Obviously, their assessment is made in the context of maintaining price stability over the medium term, and the ECB does not react to their signals unless price stability is endangered. To recap, if monetary policy does not react directly to asset price developments or to an asset price bubble, it has clearly to take under consideration all the consequences of these developments on aggregate demand and aggregate supply, on economic agents’ confidence and expectations, since they may at some point affect price developments. Let me now turn to my second point, that is the implications of asset prices bubbles for financial stability. 2. Implications for financial stability  Over the last decade, we have experienced several financial crises and contagion episodes: just to name a few episodes, the Mexican crisis in 1994-1995, the Russian-LTCM in 1998, the “Tech-Bubble” that ended in 2000, or more recently the financial crises in Argentina and Turkey. However, recent  2  J. M GUTTENTAG and R. J HERRING (1986), “Disaster myopia in International Banking”, Essays in International Finance, 164, Princeton University. BIS Review 28/2002  3  3  research has shown that, if the frequency of financial crisis is not significantly different from what was observed in previous periods over the long run (1883-1998), recent episodes were certainly shorter, but perhaps more severe.

-  increased competition between issuers, which has encouraged the standardisation of sovereign bonds, the gradual convergence towards “best practices”, the development of a range of attractive and actively traded benchmark issues (especially for sovereign bonds). Besides, competition has also enhanced liquidity as issuers have increased the average size of outstanding bonds. -  the modernisation of market structures: besides the rapid development of electronic trading, the consolidation of Central Securities Depositories is also paving the way for a more efficient functioning of Delivery-versus-Payment procedures, and easier and safer channels of settlement of cross-border securities transactions. This last point is of particular relevance for the Eurosystem, as the smooth functioning of European securities settlement infrastructure is key for the practical implementation of monetary policy. On the equity market, the elimination of the currency risk within the euro area has led investors to shift from a domestic orientation to a more international, sectoral one. The creation of a wide range of pan-European sectoral indices was, thus, a direct consequence of these changes in investor strategies. Additionally, the introduction of euro has been a strong catalyst for mergers and acquisitions in the financial sector. For instance, in this respect, we can stress current trends in mergers or close co-operation between banks, stock exchanges, securities settlement systems, clearing houses. Had the euro not been created, would it have been thinkable that the Paris, Brussels and Amsterdam exchanges merge to create EURONEXT ? The large European goods and services market.