enhanced role for the private sector in crisis resolution. iv. financial market turmoil also raises concern about the stability of the national financial systems. prudent financial regulation and supervision are the foundations of financial system stability. why and how central banks should be involved requires constant clarification. there are good reasons for advocating central bank involvement in financial regulation and supervision. let ’ s start with financial supervision. financial system stability is a prerequisite for the efficient conduct of monetary policy. consequently, the ec treaty calls for the european system of central banks to contribute to the stability of the financial system ( art. 105 ( 5 ) ec ). macro - prudential supervision is in the best interests of central banks. in conducting monetary policy and in operating payment systems, central banks gain valuable information on the stability of market participants. " the marrying of microand macro - prudential analysis ", as bis general manager andrew crockett once put it, allows us to exploit synergies of monetary policy and financial supervision. in the field of financial regulation, the eu is currently deliberating whether to introduce the “ lamfalussy model ”, which is now applied in securities regulation in the banking and insurance sectors as well. the ecofin council and the european parliament would thus make a decision only on the framework for envisaged legislation – known as “ level 1 ” – while a regulatory committee would decide on the technical details of new laws – “ level 2 ”. in the “ lamfalussy model ”, this regulatory committee comprises only representatives of the ministries of finance. however, “ level 2 ” needs to draw on the expertise of central banks. why is that so? for the banking industry, one of the main tasks of european regulators consists in translating internationally agreed standards into european law : basle ii, the new minimum capital requirements, will be next. central banks are experts on basle ii, since they are substantially involved in negotiating the new capital accord in the basle committee on banking supervision. they are truly familiar with the details of the new framework and such knowledge is indispensable for the eu legislative process. but it is not only the details that count. the regulation of the banking industry has an even larger bearing on the real economy than the regulation of the securities industry does. banking regulation may affect the competitiveness of the overall economy in various ways owing to the national specifics of financial systems. central banks are experts on the national financial systems. exploiting the

, should monetary policymakers broaden their focus to include share prices in their definition of price stability? well, in my opinion, that is not a good idea. the objections to targeting asset prices weigh more heavily. to begin with, there is the issue of defining the appropriate asset price level. there is no way in which central banks can make a “ diagnosis ” superior to that of the market. then, even if the matter of diagnosis issue could be solved to our satisfaction, stabilising consumer prices and stabilising asset prices might call for diverging policy paths. central banks could well find themselves faced with the dilemma of having to decide to which goal they should give priority. the fact that bubbles tend to occur in periods of low inflation only accentuates that potential conflict. and, last but not least, there is the question of “ moral hazard ”. central banks would need to respond in perfect symmetry to overshooting and to undershooting stock prices. financial markets would become severely distorted if market participants were to come to the conclusion that the central bank would let them enjoy returns when the markets are up but bail them out once the market goes downhill. instead, we should stick to our tried and tested approach of stabilising the general price level in the product and services markets. nonetheless, monetary policy contributes to a sound development of asset prices. the eurosystem ’ s monetary policy strategy emphasises money supply in the first pillar of its strategy. an adequate money supply – that is, money supply which is in line with potential output growth – is a necessary condition for preventing the emergence of speculative bubbles. also, a low inflation rate in itself fosters long - term investment and helps to stabilise asset prices. this summer, euro area monetary policy has been confronted with conflicting signals : monetary growth continues to be strong. its high growth rate owes much to low opportunity cost and ongoing portfolio reallocation. given weak final demand, the risk of ample liquidity being channelled into inflationary pressure is regarded as quite low. a more serious risk to price stability is the price of crude oil, which has begun to climb upwards in the wake of increasing political tension in the middle east. further non - negligible risks to price stability stem from a potential weakening of the stability and growth pact. some european countries, among them my own, need to make intensified efforts to balance their budgets. the pact is symmetrical with a lower limit : balancing the budget over the economic cycle requires