It is important to strike a balance between the two by enhancing regulatory and supervisory structures, as this process should by no means result in stymieing competition or economic agents' creative energies. 3. The EU lacks certain institutions. This is clearly pointed out in the De Larosière Report. The chapter focusing on EU supervisory repair proposes a structural reform targeting two areas, namely micro-prudential and macro-prudential supervision. The Report recommends the establishment of the European Systemic Risk Council (ESRC), which should pool and analyse information pertaining to macro-prudential risks and vulnerabilities across all EU financial sectors. The ESRC shall issue risk warnings and shall adopt economic policy recommendations. Another institution proposed in the Report is the European System of Financial Supervision (ESFS), within which the level 3 committees (CEBS, CEIOPS, CESR) will be transformed into three new European Authorities: the European Banking Authority, the European Securities Authority and the European Insurance Authority. These three entities will have wider powers in the licensing and supervision of some specific EU-wide institutions, but it is the strong coordinating role of the ESFS that I want to stress. The fact that the European Systemic Risk Council would be set up under the auspices of the ECB and of the European System of Central Banks would allow it to benefit from the  2  BIS Review 56/2009  analytical capabilities and technical infrastructures developed by central banks in their own monetary and financial stability analyses. This also implies a strong cooperation between the ESFS and the ESRC.

The latter, along with the overly high level of savings, helped keep interest rates and volatility at bay. All this translated into a new financial texture, in which the bank intermediation model shifted away from "originate and hold" to "originate and distribute". The new products and institutions that changed the fabric the financial system was made of until three decades ago led to the outbreak of the current financial crisis. The financial crisis was triggered by the  BIS Review 56/2009  1  developments in the US subprime mortgage market, as I have mentioned earlier. In turn, it broke out due to the fact that the Federal Reserve System, given the above-mentioned conditions, had no other option but to increase interest rates with a view to maintaining low inflation. With the new financial texture however, rate hikes brought about the emergence of the financial crisis. In view of the above, my opinion is that ample liquidity changed the financial system to the point where monetary policy found itself trapped. Inaction would have resulted in higher inflation. The actions taken brought about financial instability. If regulation and supervision had prevented the excessive build-up of risks by investors, interest rate hikes could not have prompted financial instability. Such developments point to the need of efficient cooperation between monetary policy, on the one hand, and regulation and supervision, on the other, a fact that failed to materialise over the past years in some of the world's leading economies.