In this context, a key initiative is the proposal for the establishment of a European Systemic Risk Board (ESRB), which will be supported analytically and logistically by the ECB and for which Lucas has already initiated a lot of groundwork. The ESRB will be an independent body responsible for conducting macro-prudential oversight of the EU’s financial system as a whole. Once the legislative process is completed, the creation of this new European policy function will fill a significant gap in the ability to detect, assess and ultimately contain the build-up of risks. In particular, the ESRB will be tasked to collect information relevant for systemic risk from across the EU. This should help overcome the significant information gaps which have hindered a comprehensive risk surveillance thus far, for instance with regard to the interlinkages among the major crossborder financial institutions. The ESRB should be seen as the component of a global framework of macro-prudential oversight. This should support its effectiveness by also allowing it to contribute to the assessment and containment of global risks, which in turn may also contribute to the mitigation of risks in Europe. The Financial Stability Board, the IMF, as well as national authorities, are all actively engaged in the development of a comprehensive framework of macro-prudential supervision, which also takes into account the risks arising from systemically important financial institutions. The crisis demonstrated that only internationally  2  BIS Review 70/2010  coordinated initiatives are truly effective in addressing risks and vulnerabilities in the closely integrated financial system.

Lessons for monetary policy With regard to monetary policy, in many respects recent events have served to confirm the approach adopted by the ECB since the outset of Monetary Union in 1999. Most fundamentally, the primacy of price stability as the objective of monetary policy has been confirmed. Indeed, at times of financial stress, the credible maintenance of price stability becomes even more important. Were the anchoring of inflation expectations to weaken, financial market tensions would intensify further and corrective measures would prove less effective. Moreover, our recent experience of financial crisis – with its roots in the evolution of bank balance sheets, and thus monetary and credit developments – has vindicated in my view the importance attached by the Governing Council to a close and regular monitoring of the monetary data. In the design of the ECB’s monetary policy strategy, it was always foreseen that the close monitoring of monetary developments would provide a framework for policy makers to consider asset price developments and potential misalignments. Responding to monetary and credit dynamics as part of a comprehensive assessment of the risks to price stability in the medium term implies that interest rate decisions will tend to “lean against” accumulating financial imbalances and asset price misalignments. Recent research provides a vastly enriched framework for conducting such monitoring in a systematic fashion, and offers a real possibility that asset price disequilibria and associated financial distress may be identified at an early enough stage for corrective measures to be taken by the policy authorities.