It has made the right diagnosis and, in the Basel III framework, drawn the appropriate lessons. My friend Nout Wellink is chairing the Basel Committee; I myself have the privilege of chairing the Committee of Governors and Heads of Supervision, which provides guidance to the Basel Committee. The second building block is regulation of the financial markets. Here, reform must ensure much greater transparency for the various market segments and products, ensure sufficient competition in all markets, and attenuate as much as possible the pro-cyclicality that derives from information asymmetries, structural features such as ratings and market phenomena such as herding. The third building block is macroprudential oversight. This new discipline focuses on the interactions between the various parts of the financial system and between the financial sector and the real economy. New institutions, including the ESRB and equivalent oversight committees around the world, will pursue the task of identifying sources of systemic risk, issuing early warnings and recommending remedial action. The birth date of macroprudential oversight in Europe will probably be identified as the start of this year but it was originally conceived in 2009 through the work of Jacques de Larosière and his high-level group, which included my friend Otmar Issing. Eighteen months from policy design to institutional establishment is a remarkable achievement. It was made possible by thorough groundwork as well as excellent transposition by the Commission and very rapid decisions by the European Parliament and the European Council. I feel very honoured to chair this new body, the ESRB.

They may arise, for example, because large parts of the system rely on the same sources of funding, or because they have similar exposures – to rising financial imbalances, to currency mismatches and to widespread mis-pricing of risk. We have also seen that turbulence can arise from relatively modest initial shocks. The system is so interconnected that what looks stable can turn out to be “meta-stable”, which means potentially highly instable. Snow on mountain slopes can be meta-stable, looking pristine and tranquil yet turning into an avalanche after only a minor disturbance. For all these reasons, we have established a new framework of macroprudential supervision as have our counterparts elsewhere, including in the United States with the new Financial Stability Oversight Council. In the case of Europe, there is still one more reason for macroprudential oversight, and that is the single European market. Cross-border and cross-sectoral financial integration within the EU is fostered by competition, freedom of establishment and the free flow of capital. The single financial market is a crucial component of the overall single market project, and macroprudential supervision should enhance the resilience of this market. So how exactly will the new discipline of macroprudential oversight be conducted? Financial stability is not an issue exclusively for central banks. Micro-prudential supervisors have a key role, because stable institutions are an essential and necessary condition for achieving financial stability.