of actual defaults and the timing of their occurrence. the paper by yang and zhou goes beyond the usual focus on the existence of contagion and will present an analysis of the pattern of propagation across financial institutions. for an illustration showing how big the challenge to identify systemic risk is, one does not need to go back very far in history. in 2003, a young analyst in new york stated the following : “ you just have to watch for the level at which a nearly unlimited or unprecedented credit growth can no longer drive housing markets higher. i am extremely bearish and feel the consequence could be a 50 % drop in residential real estate in the us. a large portion of the current [ housing ] demand at current prices would disappear if only people were convinced that prices were not rising. the collateral damage is likely to be of orders of magnitude worse than anyone now considers ”. 4 it took another 4 years that these risks and, particularly, the systemic impact and costs materialized. analyzing systemic risk means, therefore, mainly going beyond mainstream thinking and challenging widespread beliefs. we are in need of the type of analyst i just quoted. i am very much looking forward to hearing this conference ’ s analysis on the containment of such systemic risk, the future challenges and the possible policy options we have going forward. quote from m. lewis, the big short, 2010.

banking sector stability : first, banks ’ business models need to become more sustainable. in my view, banks ’ business strategy should not be directed towards increasing short - term profits by way of taking on extensive risks to the detriment of the long term viability of their business. in fact, the level of announced profit targets and their impact on peer banks has also to be seen from the perspective that higher profits mean higher risk taking and, hence, do not necessarily originate from efficiency gains alone. second, i believe that it is crucial for banks to undergo a serious reform of their corporate governance and compensation schemes. in particular, the incentives of traders, ceos and creditors of the bank should adequately reflect the risks involved so as to internalize the costs of their risk taking and potential failure. this can be achieved through appropriate compensation schemes, more transparency vis - a - vis creditors and shareholders and generally improved oversight of banks ’ business. overall, the managing board of a bank has to shift the focus away from short - term objectives towards a longer term corporate strategy. this also includes being more accountable for the risk taking of the overall business of the bank, which brings me to the next challenge. third, risk management practises need to be improved. most risk management techniques – not just used by banks but also by rating agencies – neglected the correlations of risks across securities and did not sufficiently internalize the growing systemic ( credit, market and liquidity ) risks. 3 moreover, banks underestimated tail risk. the existing risk management techniques worked well at predicting small day - to - day losses under normal circumstances but failed to predict severe losses that are very infrequent. however, it is exactly those severe losses that matter the most. therefore, banks need to devote greater attention to their risk management. this means in particular that the risk management function needs to receive a more prominent role in the organizational structure, specifically with respect to authority and independence. regulating markets and infrastructures concerning the regulation of financial markets, the crisis has clearly shown that turbulences in one segment of financial markets can create spill - overs and contagion to other segments. moreover, we have seen that both banks and other types of financial intermediaries had been seriously affected by the financial crisis. therefore, i welcome the recent agreement to establish three pan - european micro - prudential supervisory authorities – the european banking authority ( eba ), the european securities markets authority ( esma ) and the european insurance and occupational