that some features of recent financial innovation – including securitisation – have contributed to excessive risk taking and increased financial fragility. they explain why the crisis has been so severe. it is also striking that real – not only nominal – interest rates have stayed at low levels for an extended period of time. over the medium run, long term real interest rates are beyond the control of monetary authorities. they have been driven by the continuous increase in saving rates which occurred over the last decade, especially in emerging economies. this created a demand for safe and liquid assets which could not be met by equivalent supply in those countries. because of this “ asset shortage ”, saving flows were directed towards industrialized countries, first of all the usa. at the same time the financial system in those industrialized countries worked to produce “ complex ” assets which looked safe and liquid – and were rated as such. apparently, supply matched demand. but we know now that this was an illusion. complex assets were neither safe nor liquid. the root causes of the crisis, therefore, are deeply structural. there was a combination of excess savings and asymmetry in financial developments between countries which was conducive to the formation of bubbles. this disequilibrium was amplified and compounded by distorted financial innovation. there was little, or no, role for monetary policy in that process. looking to the future, however, it is legitimate to ask how monetary policy can better contribute to financial stability. here, i would make four points 1. financial instability should first be addressed and dealt with by specific tools. those tools come in many forms, such as capital or margin requirements, loan to value ratios and liquidity constraints. most are currently available to regulators and supervisors. they have been used, however, with one objective : ensuring the robustness and viability of individual institutions. there is now a need, which is widely recognized, for a change in perspective. regulation and supervision should be designed and implemented in a broader, systemic perspective, with the objective of ensuring the stability and integrity of the financial system as a whole. 2. there is a strong case for giving central banks a pivotal role in this new “ macro financial supervision ”. they have intimate knowledge of financial systems and markets. they have an incentive to act since monetary policy works better when financial institutions are robust and financial markets are stable and efficient. and, finally, they are well placed to have an integrated view of the economy and its interaction with the financial

edgar meister : eu banking sector stability statement delivered by mr edgar meister, member of the board of the deutsche bundesbank and chairman of the bsc, frankfurt, 24 february 2003. * * * in my capacity as chairman of the banking supervision committee ( bsc ), i am very pleased to present to you the committee ’ s report on eu banking sector stability, which has been prepared with the assistance of the working group on macro - prudential analysis, chaired by jan brockmeijer from the dutch central bank. the report summarises the outcome of one of the main lines of the committee ’ s activity, namely our regular monitoring of banking sector stability in europe. this is an activity that we have developed over the past few years through the cooperation of the eu national central banks, the eu banking supervisors and the ecb. we have now reached a stage where we felt we could share our findings with a wider audience. the stability analysis is based on a wide range of quantitative and qualitative information drawn from national supervisory data sources and the ecb, as well as on an exchange of information among the member organisations of the bsc, the eu central banks and supervisory authorities. the bsc has already achieved substantial progress in terms of harmonising consolidated bank profitability and balance sheet data - something which is of pivotal importance for macro - prudential analyses. i am confident that today ’ s presentation will be the starting point for what will develop into a good tradition. the main purpose of the document is to provide an overview - from an eu - wide perspective - of the resilience of the eu banking sector and of the potential threats to its stability. the report also places into the public domain new eu - level information on bank profitability and solvency developments. i believe that the report - and, more generally, the monitoring activity of the committee reflected in the report - will bring two main benefits. first, the eu - wide scope of our analysis complements the similar analysis carried out by the competent authorities at the national level with reference to domestic banking systems. second, the close cooperation among central banks and supervisory authorities produces substantive value added in terms of forming an assessment of the relevant issues. let me now turn to the main findings of the review. we find that banks ’ profitability weakened in 2001 and showed a further weakening in the first half of 2002. the downward trend in profitability has come about as a result of two adverse developments in the eu banks ’ operating environment. first