sharing and supported exuberance in the financial sector. “ shadow banking ” ( the english insurance companies and international investors ) played a pivotal role. as liquidity stress morphed into solvency problems, the bubble burst with a dramatic international stock market crash. you can see how the mechanics of this crisis do not differ much from those of the recent great financial crisis, and all other crises traced through history by charles kindleberger. 3 p. hakkarainen ( 2015 ) finance cycles and macroprudential tools - the case of finland within the euro area. speech at the seventh high - level policy dialogue of the eurosystem and latin american central banks, madrid, 11 november. r. frehen, w. goetzmann and g. rouwenhorst ( 2013 ) new evidence on the first financial bubble. journal of financial economics. vol. 108 ( 3 ), pp. 585 – 607. bis central bankers ’ speeches my second point is that there is a consensus that macroprudential policy is an essential toolkit but its effects and transmission channels are still not fully understood. since the 1930s, policymakers have used prudential means to enhance system - wide financial stability, with a view to limiting macroeconomic costs from financial distress. some measures taken in the 1930s, 1950s and 1960s to support the domestic financial system and to influence the supply of credit have been viewed as macroprudential tools. 4 still, when andrew crockett pleaded for a macro perspective on prudential policy in 2000, the idea was controversial. 5 it took the great financial crisis to forge a consensus on the importance of macroprudential policy. as pentti put it, “ macroprudential policy is needed in addition to other economic policies. it is very important that authorities have also macroprudential instruments available. now, after the great financial crisis, we have instruments and framework in place. ” 6 but in his usual sharpness pentti also highlighted the challenges to using macroprudential tools : “ the effects of the said instruments are uncertain and second, processes for their usage are unnecessarily complicated. these points are intertwined. ” 7 my third point – and here i would like to elaborate a bit – is that we should not look at macroprudential policy and its effectiveness in isolation. as pentti argued in a speech last year, it is important to coordinate macroprudential policy and monetary policy

addition, many of the borrowers used to be companies with close ties to the government. as a result, there were few incentives for risk control and return enhancement. instead, some banks used to generate profits by exploiting certain privileges which no longer exist. what is necessary, and what has been done to some extent in some countries, but not all, is privatizing state - controlled banks and promoting free market entry. this will provide bank managers with the right incentives to make risk / return assessments. adequate bank supervision and financial markets oversight are required to ensure that sufficient weight is given to risk control. foreign ownership may help to transfer certain specific banking skills to candidate member states, even though i do not favour a big january sale of financial institutions in the countries concerned. the current problems in certain asian countries show that a bad loan overhang can severely impede the functioning of the economy. balance sheet restructuring in countries in central and eastern europe may require intervention by the competent authorities in some cases. it may be necessary to let some banks fail. it may be necessary for governments to take over bad loans inherited from the communist era. this would enable some credit institutions to conduct business more effectively. in order to prevent moral hazard, the rescue of selected credit institutions can only take place under certain conditions, most likely including the lay - off of those responsible for making these loans. importantly from a macroeconomic point of view, any debt restructuring involving government money should find expression in official figures for government debt. this would provide a better insight into the actual financial situation in the countries of central and eastern europe. reducing uncertainties in this respect is likely to build up confidence and attract rather than deter foreign investors. – 5 – concluding remarks i have spoken on the monetary relations between the euro zone and the countries of central and eastern europe. let me conclude by presenting some ideas about the relations between the european system of central banks ( escb ) and the central banks of the candidate member states. although candidate member states obviously cannot take part in escb meetings before their accession to the european union, it could be useful to invite the governors of the central banks of the “ fast - track ” countries once a year to attend a special meeting of the general council of the ecb. this would be similar to the current practice for the council of economics and finance ministers ( ecofin ). apart from that, the ecb staff could be asked to make a yearly assessment of the state of progress in applicant countries. finally,