asset quality and the adequacy of the capital buffers of some euro area institutions and resulted in an abrupt and significant deterioration in money market conditions. consequently, government and central bank actions were necessary to help stabilise the banking system. since september this year, tensions have increasingly spilled over from the financial sector to the real economy. in the euro area, a number of the downside risks to economic activity that had been previously identified materialised. the significant weakening of economic activity could have a negative effect on borrowers ’ ability to service their debt and thus on the credit risk faced by banks. according to the december 2008 eurosystem staff macroeconomic projections for the euro area, global economic weakness will persist in the coming quarters ; thereafter we expect a gradual recovery, supported by the fall in commodity prices and assuming that the external environment improves and the financial tensions weaken ( see chart 3 ). losses related to banks ’ operating activities are not included, to the extent that investments in related assets can be segregated from operating losses. if a bank ’ s core business involves mortgage - loan origination, securitisation, or otherwise requires the firm to hold related assets, these losses are included. losses from investments in all other banks or firms are included only if the firms or banks in question are not included in the data used to compute these figures, or if the loss affects cash flows, as in the case of fixed income securities. figures are pre - tax and net of any relevant financial hedges and off - setting gains, unless a bank does not report these factors. most recorded losses are the quarterly or accumulated losses that were reported at quarter - end. one important exception is when the company reports provisions for credit losses and charge - offs. in this case, the year - over - year increase in provisions or charge - offs are used instead, in order to minimise the impact of normal operations on the figures. unless it is certain that loan charge - offs are not included in new provisions for losses, these charge - offs are only recorded for 2007. the underlying assumption is that charge - offs after the end of 2007 are already included in previously recorded provisions. some banks do not expect to fully realise these write - downs, especially in the case of unrealised losses, mark - to - market losses, and loss provisions. inclusion in the figures is not meant to imply that the firm has already incurred such losses, and any reversals or realised gains are included to mitigate the effects on

##ulation. this field of research has been mostly empirical. theory has been slow to explain destabilizing behaviour in a way that would be applicable in practice. banking crises can be interpreted an extreme manifestation of the financial cycle phenomenon. there is a lot of empirical literature on their early warning indicators. because no country has had enough banking crises to have a representative sample of them, this literature is almost exclusively based on panel data. for instance, recent working papers published by the european systemic risk board and the bank of finland have systematically tested the predictive power of different early warning indicators. banking crises are in most cases preceded by three parallel phenomena, namely excessive credit growth, house price bubbles and large current account deficits. these three phenomena preceded the scandinavian crises more than 20 years ago, as well as the most extreme recent crises in europe and the great recession of the u. s. banks ’ increasing bis central bankers ’ speeches reliance on money market funding other than retail deposits is also observed quite regularly in the development before crises. therefore, the archetypal banking crisis is preceded by a phase when banks finance the current account deficit by borrowing in international wholesale markets and channel this funding to the domestic economy by granting loans to customers who buy real estate. although business loans are more likely to be written off as loan losses, macro level studies have found housing loans more destabilizing than corporate loans. ( detken et al 2014, kalatie & al 2015 ) according to claudio borio, we can measure the credit cycle phenomenon pretty well just by focusing on credit volumes and property prices. judging by the results from standard filtering techniques, the credit cycle seems much longer than the ordinary business cycle, possibly about 15 years. if anything, financial cycles are becoming longer and more pronounced. some academics, including martin hellwig and charles goodhart, have even argued that the capital requirements have actually amplified the financial cycle ; banks restrict lending when capital adequacy requirements are about to be violated, which slows down economic growth and puts downwards pressure on asset prices, worsening credit risks. financial cycles in finland ( slide 2 ) what has finland learnt on the financial cycles as a small country and a member of the monetary union? at the moment, it seems that being a member of the monetary union has had a rather limited direct impact on the cycle in finland. the finnish financial sector has been rather well insulated from the instability experienced in some other member countries. three bank of finland economists, adam gulan,