Now we are observing renewed tensions, as the costs of supporting financial sectors, fiscal stimulus and automatic stabilisers brought the focus to public finances across many countries both within and outside the euro area. BIS Review 70/2010  1  With hindsight, the financial crisis has reminded us that the seeds of financial instability are often the same: balance sheet mismatches, high leverage (on or off balance sheets) and very rapid growth of financial institutions. Essentially all of these elements were at play in one form or another in this episode. Now what are the lessons for financial stability monitoring and assessment frameworks as implemented by the responsible authorities? A first observation I would like to make in this respect is, that we, as other central banks, had been drawing attention in our semi-annual Financial Stability Review, which Lucas was overseeing for many years, to the risks that were building up. For at least two years before the turmoil began, we issued clear warnings about vulnerabilities that were building up on account of an increasingly aggressive hunt for yield which was underpinning significant under-pricing of risks across a variety of asset classes, not only credit derivatives. And, I should also say that, the same warnings were communicated by several other central banks. A second observation is that in parallel with our financial stability assessments, we also repeatedly warned euro area governments of the risks of not consolidating fiscal positions in accordance with the rules of the Stability and Growth Pact.

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.