monetary developments, the euro area has consistently enjoyed ample liquidity conditions. Measured in terms of the moving three-month average, the M3 aggregate, which started the year with a growth trend of above 6%, began to show signs of slowing in the second BIS Review 115/2000  2  quarter of 2000, due in particular to the hikes in the key rates. It worked out to 5.5% for the August to October 2000 period, that is, one point above the 4.5% reference value. Although M1 growth (banknotes and coins, overnight deposits) has slowed considerably, it was still very sustained with a year-on-year increase of 5.8% in October. Overnight deposits alone rose by 6.6%. This dynamism reflects the need for high cash balances in a brisk economic environment, despite the increase in the opportunity cost of holding such balances. In October, the annual growth rate of credit granted by monetary financial institutions to the private sector was 10.8% and that of loans 9.7%, while financing extended in the form of securities purchases grew by 21.2% year-on-year. This strong growth in credit to the private sector underlies the marked expansion of M3. The dynamic trend in the credit to euro-area residents counterpart to M3, which reflects the good performance of the economy, can also be explained by the increasing borrowing requirements of telecommunications operators, surging property prices in certain euro-area countries, and the spread of mergers and acquisitions. However, external transactions have had a restrictive impact on M3 growth, albeit to a lesser extent than in 1999.

Apart from being more comprehensive, such approach will help ensure that the economic cost of policy or regulation is spreaded out, thereby avoiding an undue burden falling on a particular sector of the economy or measure. Table 1. summarizes the policy framework along the line I have just described. The framework encompasses a three-pronged approach to address procyclicality, focusing on taming the business cycle, the financial cycle, and the risk-taking behaviour cycle through a combined use of macroeconomic policy, financial regulation, and other education and disclosure measures. On macroeconomic policy, especially monetary policy, the role of policy is to achieve longterm economic growth with stability. This means avoiding too-eased monetary conditions for too long by tightening policy when there are signs that risk is being underestimated and imbalance is developing. For financial regulation, its role is to reduce the procyclical behaviour in the financial institutions by limiting excessive risk-taking. And the role of education and disclosure is to promote greater awareness of risk by making available information to improve risk assessment by market, so that extreme shifts in sentiment and confidence are avoided. Important in this context for emerging markets is the abrupt shift in  BIS Review 160/2009  3  investors’ confidence that drives sudden reversals of capital flows and liquidity. But amongst all these measures, financial regulation remains the core approach to addressing procyclicality. This is because large and sustained booms on credit and asset prices, once they occur, are typically a reflection of the failure of financial institutions to manage risk.