Many observers feared then that, if the crisis were allowed to run its course, it could be near catastrophic for the region and extremely dangerous for the European banking system. But I am pleased to say that this potential “catastrophe” was avoided and I would like to devote my remaining time to the question of how this was done – the third aspect of the convergence process I previously mentioned. I believe answering this question may provide lessons for countries that are currently facing similar challenges in the euro area. 3. The reaction of CEE countries to the global financial crisis: what can be learnt? In my view, the return to the convergence path is being achieved thanks to a combination of four main elements. First and foremost, there are domestic policy actions to address macroeconomic imbalances at the national level. The precise policy actions differ across countries, reflecting the different country-specific challenges and policy frameworks in place. But the actions generally require a strong fiscal adjustment and/or measures to maintain confidence in the soundness of the financial sector. Second, the reaction of the international community has been essential. Where funding challenges became more acute, international financial assistance led by the IMF – jointly with the EU in EU Member States,– has been crucial in supporting market confidence and avoiding financial crises. The balance of payments support facility available for EU Member States has been reactivated, while the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank have supported several countries.

We undoubtedly need a  2  BIS Review 84/2005  greater degree of co-ordination between supervisors than hitherto, and we need greater consistency in supervisory practices. As I said, we need a framework that rationalises the compliance burden and streamlines the interaction between supervisory authorities. We need banks that manage risks, not unnecessary supervisory requirements. Thirdly, we need an approach that uses the full range of tools at our disposal. In other words, we should not just look for legislative solutions to the challenges that face us. What we need is effective and timely implementation of the laws and regulations that exist, and convergence in their application. This comes through co-operation and information-sharing between supervisors. And let me also mention here the potential offered by supervisory transparency. We have heard much about market discipline in the context of the disclosure requirements that will apply to banks under pillar 3 of the revised Basel capital framework. But I think that increased disclosure by supervisors, especially on a comparable basis, also has an important role to play, not only in helping us to monitor consistency of approaches across countries, but also in driving greater convergence through exerting a kind of market discipline for supervisors. Finally, allow me to put my Basel hat on for a moment. I think Basel II certainly offers its fair share of implementation challenges, but also provides us with by far the biggest opportunity to make progress in building a more consistent and efficient co-operative approach to supervision.