lucas papademos : ecb financial stability review june 2008 – opening remarks opening remarks by mr lucas papademos, vice - president of the european central bank, at the press briefing on the occasion of the publication of the june 2008 ecb financial stability review, frankfurt am main, 9 june 2008. * i. * * introduction my colleagues and i would like to welcome you to today ’ s press briefing on the occasion of the publication of the june 2008 edition of the ecb financial stability review. the financial stability assessment contained in the review has been prepared with the close involvement of the escb banking supervision committee. it is for the most part based on information that was available up until 8 may, the “ cut - off ” date for this review. it is now ten months since the eruption of the market turmoil which was triggered by the surge in delinquencies on us subprime mortgages. the financial systems of the euro area and other advanced economies are still undergoing further adjustment as the processes of risk repricing and de - leveraging continue. the stresses on financial systems have persisted longer and they have become broader and deeper than anticipated six months ago. although there have been some signs of easing tensions in certain markets since mid - march, elevated pressures remain in others, notably in the term money markets of major currencies. moreover, high uncertainty surrounds the future dynamics of property and other asset prices, the magnitude of possible further asset valuation write - downs by financial institutions and the effects of the market turmoil on the broader economy. let me recall that the primary objective of the ecb ’ s financial stability review is to identify the main sources of risk and vulnerability to financial system stability and to provide a comprehensive assessment of the capacity of the euro area financial system to absorb adverse disturbances. the june 2008 issue of the review also examines in some detail the main trends and events that characterised the operating environment of the euro area financial system over the past six months and it contains 17 boxes and three special feature articles that address topical financial stability issues in a more focused and analytical manner. i will start my presentation with a brief review of the current state of some parts of the global financial system that have been significantly affected by the ongoing financial market turmoil. i will then examine the risks and vulnerabilities in : ( 1 ) the global macro - financial environment ; ( 2 ) the euro area corporate and household sectors and ; ( 3 ) the euro area financial system. finally, i will conclude with

instruments in our monetary policy toolkit. it is clear that the set of ecb policy rates – the rate on our main refinancing operations, the deposit facility rate and the marginal lending rate – will remain our primary instrument. but, in a low interest rate environment in which the policy rates are more likely to encounter and remain constrained at the lower bound, the ecb will continue to employ other instruments when the need arises. forward guidance, asset purchases and longer - term refinancing operations over the past decade have helped mitigate the limitations generated by the lower bound and will remain an integral part of the ecb ’ s toolkit, to be used as appropriate. we have also made important changes to our analytical framework. this framework provides the foundation for our monetary policy decisions, including the regular proportionality assessment of the effectiveness, efficiency and side effects of our measures. historically, the ecb has been known for its “ two pillars ”, which identified risks to price stability as originating from two distinct domains : the “ economic analysis ” and the “ monetary analysis ”. these two sources of risks were cross - checked against each other to form an overall assessment. our new strategy acknowledges the advantages of having two specialised areas of analysis on the economy, but also recognises the value of integrating the analysis, in a world in which there are multiple feedback channels from the monetary and financial spheres to the broader economy, and vice versa. this new integrated assessment builds on the evolution that our economic and monetary analyses have undergone over time. the monetary analysis has increasingly focused on assessing the transmission of monetary policy measures, as well as the risks to price stability from financial imbalances. meanwhile – owing to a weakening of the link between monetary aggregates and inflation – the original focus of the monetary analysis has become less important. at the same time, the global financial crisis brought to the fore the relevance of macrofinancial linkages that further emphasise the need for integrated analyses. we have acknowledged that climate change is an existential challenge for the world, and it is of strategic importance for the ecb ’ s mandate. the governing council therefore decided to account explicitly for the implications of climate change and the carbon transition in our new strategy. the governing council today commits to an ambitious action plan, outlined in the dedicated press release. the action plan covers several key areas. first, we will further expand our analytical capacity in macroeconomic modelling and develop statistical indicators and new tools to assess the implications of climate