behaviour has not yet been tested in difficult market conditions. as for any new instruments, probability analysis on the basis of historical data cannot be used for the credit risk transfer instruments that have been around for a few years only, and, thus, an accurate pricing of risk is not always possible. inadequate data was already a problem in the use of value - at - risk models for risk management purposes by hedge funds prior to the russian and ltcm crises. this kind of experience could reflect a lack of full understanding by market participants of the nature of the risks they face. turning back to the credit risk transfer instruments, these instruments allow banks to sell their credit risks, and in so doing the risk profiles of other financial institutions, particularly insurance companies, are also transformed. hence, a major outcome of the financial innovation process is the transformation of the traditional risks faced by financial institutions. these developments also affect the effective supervision of financial institutions, as it is increasingly more difficult to obtain adequate information to monitor the complex and possibly fast - changing risk positions. the financial innovation process has, indeed, necessitated the revision of the traditional supervisory approach concerning banks and other financial institutions. it has also made it imperative to ensure that the risk management systems of the financial institutions themselves are able to handle the complexity of their activities. b. 3 integration of european and global financial markets i would now like to turn to the last of my three themes. the increasing integration of national financial systems poses particular issues for the european union and the euro area where integration is fairly advanced, although not fully complete. integration and increasing international financing flows are also very much a global issue. recently, in particular, some emerging market crises have had at least a potential for major spillover effects. these financial stability risks may also be related to the growing complexity of the financing of emerging countries and the related coordination problems. with many more parties and instruments involved, it is inevitable that coordination is becoming a much more pressing problem than in the past, when a small number of major banks from the industrialised countries could come to an agreement with the issuer on the terms of repayment. with more sophisticated funding structures and the increasing use of debt securities, equality among creditors also becomes a more complex issue at times of debt restructuring. c. policy framework aimed at preserving financial stability let me now look at policy responses to the issues raised by the market developments i have just described. the structure of this policy discussion will be based around three themes : the importance of transparency in order to

##preciation of the exchange rate of the euro. in addition, the three - month average of annual m3 growth followed a gradually rising path, approaching 6. 0 % as from the summer of 1999. in conjunction with strong growth of credit to the private sector, at annual rates of around 10 %, this indicated that liquidity was ample in the euro area. against this background, there was a greater risk that the rise in import prices could trigger lasting effects on inflation and have an adverse impact on the outlook for price stability in the medium term. the governing council has responded to these upward risks to price stability over recent months, with three successive increases in the ecb interest rates, which were effected in november 1999, and in february and march 2000. as a result of these increases, the main refinancing rate now stands at 3. 50 %, while the rates on the marginal lending facility and on the deposit facility have reached 2. 50 % and 4. 50 % respectively. these decisions were taken in order to contain the risks to price stability in a timely and pre - emptive manner. in this way, they have also contributed to the achievement of sustainable, non - inflationary economic growth in the euro area. at present, the outlook for growth in the euro area is better than it has been for years. this positive outlook can be largely attributed to the convergence process in the run - up to stage three of emu, as reflected in stable prices, a clear improvement in the public finance situation and a low level of interest rates in the euro area. however, the exchange rate of the euro does not reflect the ongoing improvement in the domestic fundamentals of the euro area economy. the depreciation of the euro in nominal effective terms over the last months will, until reversed, put upward pressure on import prices and continue to affect the risks to price stability. developments in the exchange rate of the euro thus remain a concern with regard to future price stability. in addition, recent monetary and credit developments confirm that liquidity in the euro area remains ample. in the light of the favourable prospects for economic growth, the impact of these developments on inflationary pressures is being monitored closely. the eurosystem will remain vigilant in assessing upside risks to price stability. it is in the interest of the whole community that, as and when required, the eurosystem acts in a timely manner to maintain a positive outlook for price stability and, in this way, to support lasting non