In retrospect, it became clear that the crisis was greatly intensified by a myriad of unknown connections and interdependencies between financial intermediaries, within and outside the banking system, including some non-regulated financial sectors. Sophisticated market participants and investors were also apparently unaware of the degree of interconnectedness in the financial system. Otherwise, their behaviour in the months leading up to the summer of 2007 might have shown some anticipation of the developments (e.g. they might have seized some contrarian investment opportunities). In particular, •  the magnitude of the large off-balance-sheet exposures of banks to the US subprime-related structured finance products was widely unknown;  •  little information existed about the extent and implications of the activities of new financial entities – conduits and other structured investment vehicles – which are linked through management and liquidity arrangements to banks;  •  the probability that the various intertwined vulnerabilities could materialise simultaneously and combine in the way they eventually did was perceived as being very close to zero;  •  the extent of inter-linkages between financial intermediaries and across markets was not fully appreciated, and the possibility of tensions in one specific segment of the credit market spreading rapidly to other markets and continents was not foreseen. For more than two years now, we have been discussing the need for major improvements in supervisory and regulatory frameworks to respond to the weaknesses that came to light as the crisis unfolded. I will not address these issues again today.

In the pre-turmoil period, supervisory authorities were more concerned about overburdening institutions with reporting requirements than with enforcing adequate disclosure. As such, an ESRB established before the summer of 2007, but with access to the same information base as the one available to central banks at the time, might not have made substantially different systemic risk assessments. In addition to the importance of having a more comprehensive information base, the crisis has led to a significant revamping of research into systemic risk and to greater input into the formulation of related policy recommendations. As I just mentioned, in addition to improvements in macro stress-testing techniques and the early warning signal literature, more attention is being paid to contagion and spill-over models, especially for the banking sector, to macro-financial risk-based flow-of-funds approach using contingent claims analysis, and to research tools to support regulatory and supervisory policy recommendations. One area in which a pre-crisis ESRB could have made a difference is in the conduct of country-specific analysis. Generally, ECB financial stability assessments focus on the euro area as a whole and rarely make distinctions between euro area countries. They mainly consider the risks and vulnerabilities common to most euro area countries; there is little analysis, let alone formulation, of policy recommendations, at country level. While this helps to distil the elements of the analysis relevant to the euro zone, country-specific vulnerabilities might end up receiving insufficient attention. The ESRB will have a clear mandate to pursue country analysis and to provide countryspecific policy recommendations if deemed necessary.