##ation of bank loans, of credit risk transfer ( crt ) instruments and of complex structured finance products resulted in the distribution of risks and the creation of risk exposures that could not be managed effectively by financial institutions and other market participants. and the international integration of financial markets and the repackaging and transfer of credit risk made possible by financial innovation partly explain how the shock to a relatively small segment of the us financial market spread globally across borders and across other markets. but this is only part of the story, because a number of other factors played a crucial role in triggering the turmoil and in propagating and amplifying its effects. let me emphasise five such contributing factors or weaknesses in the financial system from a larger list : • first, inadequate risk assessment and management, especially of funding liquidity risk, concentration risk, the risk embedded in complex structured finance products, and the risks associated with the off - balance sheet exposures of banks. • second, shortcomings and uncertainties in the valuation of structured finance products, due to their complexity, imperfect information about the underlying asset characteristics and excessive reliance on the ratings of such products by credit rating agencies. • third, distorted incentives that, inter alia, adversely affected the implementation of the “ originate and distribute ” model by banks and other market participants in the chain of origination, distribution and acquisition of credit risks ; • fourth, the emergence of new financial entities – the off - balance sheet conduits and structured investment vehicles – which were sponsored by banks and which were characterised by excessive leverage and maturity mismatches on their balance sheets, because they held illiquid structured finance products and financed them by issuing short - term asset - backed commercial paper ; • fifth, and last on my list, imperfect information about the quality and performance of underlying assets, inadequate transparency about the characteristics and risks of structured finance products and insufficient disclosure about the risk exposures of financial institutions as a result of their on - and off - balance sheet holdings. this list of other contributing factors and system weaknesses – and it is not an exhaustive list – shows that it was not the processes of financial integration and innovation per se that were responsible for the market turmoil. other specific factors such as inadequate risk management, valuation problems and uncertainties, distorted incentives, imperfect information, insufficient transparency and disclosure played a crucial role in the propagation and amplification of shocks. put differently, the rapid advances in financial innovation and integration had not been accompanied by adequate appreciation of

luis de guindos : outlook for the euro area economy and financial stability introductory remarks by mr luis de guindos, vice - president of the european central bank, at the 34th edition of " the outlook for the economy and finance ", organised by the european house - ambrosetti, cernobbio, 1 april 2023. * * * financial stability is essential to the ecb's primary objective of price stability. the events of the past few weeks have reminded us of the benefits of strong and harmonised banking regulation and the importance of completing the banking union. we are closely monitoring developments in financial markets and financial institutions. the euro area banking sector is resilient, with strong capital and liquidity positions that are well above the minimum requirements. and banks currently meet a very large portion of the liquidity requirements with the most liquid asset available – reserves held at the central bank. this situation is very different to 2008 and 2009. since then, harmonised european banking supervision has been set up and we have made good progress in implementing the global regulatory reform agenda that was launched in the aftermath of the global financial crisis. but there is no room for complacency. recent events in financial markets have heightened uncertainty, which may hamper the transmission of our monetary policy across the euro area. and we are likely to see a further increase in banks'cost of funding, a tightening of credit standards and a deceleration in the growth of lending volumes. there could also be a drop in consumer and investor confidence and lower overall aggregate demand. however, it is too early to draw conclusions about the impact all of this will have on growth and inflation. the turbulence may well be short - lived, but if amplification effects do emerge, they will show up in the data. in this context of heightened uncertainty, our approach to bringing inflation down to our 2 % medium - term target will remain data - dependent. as we clarified in our latest press conference, our future policy path will be determined by our assessment of the inflation outlook in light of the incoming data, the dynamics of underlying inflation and the strength of monetary policy transmission. we believe that headline inflation is likely to decline considerably this year, while underlying inflation dynamics will remain strong. we came from double - digit monthly inflation in the euro area towards the end of 2022. inflation has been edging downwards, falling to 8. 5 % in february, to 6. 9 % in march ( flash estimate ), and we