In addition, the ECB and the Federal Reserve Bank of New York negotiated a US dollar/euro swap agreement on 12 September. The purpose of the agreement was to channel US dollar funds to European banks, which are not counterparties of the Federal Reserve for its discount window operations. European banks faced difficulties in raising short-term US dollar funds due to the disruption in the US financial system. Second, as to the co-operation between central banks and banking supervisors, the ECB, the national central banks and the banking supervisory authorities of all EU countries have recently signed a Memorandum of Understanding. It establishes arrangements for co-operation and sharing information with respect to risks in large-value payment systems. Third, as regards banking supervisors, the EU Economic and Financial Committee has recently reached the conclusion – also endorsed by the finance ministers – that, while the existing institutional arrangements for supervision and crisis management are adequate, cross-border co-operation needs to be fostered. The co-operative bodies of banking supervisors in the European Union – the Banking Supervision Committee of the ESCB and the Groupe de Contact – are currently addressing this recommendation. The opinion of the ECB is also that the existing arrangements can provide an adequate and flexible basis for safeguarding financial stability at the European level. We have also stressed that co-operation needs to be enhanced in order to ensure the effective execution of prudential supervision and corrective action in crises. For the single monetary policy, it is important that financial stability is effectively maintained.

1  Haldane (1928). Haldane is, regrettably, no relative. BIS central bankers’ speeches  1  2. Evolution of the financial system  The past fifty years have seen seismic shifts in the structure, size and composition of the global financial system. These changes gave birth to the too-big-to-fail problem. Chart 1 plots the ratio of banking sector assets-to-GDP, and its cross-country dispersion, for a set of 14 advanced countries over the past 140 years.2 For the better part of a century, between 1870 and 1970, financial deepening in these countries followed a modestly upward trend. Over this period, the average bank assets-toGDP ratio rose from 16% to over 70%, or less than 6 percentage points per decade. Since 1970, this trend has changed trajectory. The ratio of bank assets-to-GDP has more than doubled over the past 40 years, rising from around 70% to over 200%, or over 30 percentage points per decade. In other words, since 1970 financial deepening has occurred five times faster than in the preceding century. For some individual countries, the rise has been more dramatic still – in the UK, the ratio has risen five-fold. In cross-country studies, financial deepening of this type has generally been found to have a positive effect on medium-term growth (Beck and Levine (2004)). Taken literally, this would suggest that the rise in banking scale over recent decades has provided a significant tailwind to medium-term growth in advanced countries. So it seemed in the pre-crisis period. But that conventional wisdom has recently been called into question.