happened all along the yield curve. this was an important improvement of their financial environment for the countries which had experienced high risk premia and higher interest rates in the past. the euro also removed the nominal exchange rate volatility and periodical realignments among euro area countries which used to significantly distort their relative competitiveness. the euro area was created only eight years ago. we are now gaining a better understanding of the effects that it is having on the euro area economies : in a nutshell, the euro is significantly helping to bring euro area economies closer together. we are now ranking higher in terms of the optimum currency area criteria. cast your mind back to the end of 1996, two years before the euro was launched. you might remember what the common wisdom was on this side of the channel at the time … what would one have thought if somebody had said : look, in ten years ’ time the president of the ecb will come and tell you that on the 1 january 2007, a 13th country will enter the euro area ; that the euro area will have a total population of 315 million people ; that the euro is a credible currency which has kept inflation in line with its definition of price stability ; and that the anchoring of inflation expectations fully reflects this credibility. also telling you that the promise made to the investors and savers as well as to the people of europe had been kept, that the new currency is as credible, as confidence - inspiring, as solid as a store of value as were the previous most credible national currencies. what would have been the reaction of the audience? well, considering how cautious a number of analyses were at that time, one would most probably have thought that it was a fairy tale. the second lesson is that monetary integration is accompanied, and supported, by an increasing degree of economic and financial integration. we have often heard the question : what ’ s so special about a monetary union among countries that are ready for it? will it bring something that was not there before? 2 we know that by moving from several currencies to a single currency many costs are reduced or in some cases may disappear altogether. the euro has therefore contributed to reducing trading costs both directly and indirectly, e. g. by removing exchange rate risks and the cost of currency hedging among the legacy currencies. information costs have been reduced as well. the euro is also enhancing price transparency and discouraging price discrimination : this is helping to reduce market segment

, the repeal of the glass - steagall act in 1999 is a prime example of deregulation in relation to banks ’ business models. if we compare the regulations in place today with those of 20 years ago, we see an unprecedented process of deregulation across regions and financial sectors. one consequence of this deregulation has been a global trend towards more diversification in banks ’ income sources, i. e. towards higher brokerage fees and commission – more generally called “ non - interest income ”. the increase in non - interest income provides banks with additional sources of revenue and can therefore provide a diversification in their overall income. at the same time, non - interest income has usually been a much more volatile source of revenue than interest rate income. investment banks, for example, have a high dependence on non - interest income. typically, they are more profitable than traditional commercial banks, but they are also much more leveraged and their earnings are more volatile ( see chart 1 ). the volatility of earnings, combined with the close ties of investment banks to other financial players, calls for a higher level of monitoring for these systemically important players. 5 in addition, recent evidence suggests that there are indeed conflicts of interest in banking that are not anticipated by the public. investment banks affiliated with financial conglomerates take positions in takeover targets before the conglomerate announces its bid. moreover, it appears that these inside trades are profitable, while the m & a deals are not wealth - creating. see a. bodnaruk, m. massa and a. simonov ( 2009 ), “ investment banks as insiders and the market for corporate control ”, review of financial studies, forthcoming. chart 1 : bank profits and volatility of earnings ( median values of return on equity and standard deviation from 2000 to 2007 ) source : bankscope. in addition, there is one problem relating to the banks ’ risk management that applies mostly to investment banks, but also to other large financial institutions : most risk management techniques neglected the correlations of risks across securities, as not just banks, but also rating agencies, did not sufficiently internalise the growing systemic, market and liquidity risks. moreover, banks underestimated tail risk. the existing risk - management techniques worked well at predicting small day - to - day losses in the middle of the distribution but failed to anticipate severe losses that are much rarer. but clearly, it is exactly those severe losses that matter most. this