not always clear where the risk exposures ultimately lie ; and third, rapid re - leveraging in some parts of the euro area corporate sector, partly induced by a surge in leverage buy - out activity, makes a turn in the credit cycle increasingly probable. the global financial market turbulence of late - february and early - march of this year vividly highlighted the existence of some of these market vulnerabilities. it seems to have reflected an abrupt reappraisal and re - pricing of risks in response to a combination of triggering events, especially a rising concern about rapidly deteriorating credit quality in the us sub - prime mortgage market and, more generally, increased uncertainty about the macroeconomic outlook in the united states. this temporary increase in financial market volatility served to illustrate how an abrupt decline in risk appetite, when asset prices may have departed from intrinsic values, can result in very sharp changes in asset valuations, even when changes in the economic fundamentals are relatively small. looking ahead, in this context of what we have called “ pricing for perfection ” – in the sense that some asset valuations appear to be based on highly optimistic expectations about future economic outcomes and very low risk premia – some markets could continue to prove vulnerable to adverse disturbances and changing market sentiment. added to this, there is uncertainty about how markets for innovative and complex financial instruments ( in particular, structured credit derivatives ) will perform and how lightly regulated and highly leveraged financial institutions will behave in a more challenging macrofinancial environment. that said, financial innovation and the growth of alternative investment vehicles, such as hedge funds, have had, in our assessment, an overall positive effect on financial markets in europe, contributing significantly to enhanced market liquidity and greater pricing efficiency, portfolio diversification and a better distribution of risks within the financial system. however, hedge funds ’ activities are also associated with potential operational and systemic risks. moreover, the monitoring and management of these risks by their counterparties and investors have become more complex. an appropriate level of transparency is therefore important for effective market discipline and for the assessment and management of risk by the counterparties of such institutions and by investors. a final point i would like to stress with regard to the activities of the eurosystem in the field of financial stability concerns its ability to cope with a possible financial crisis affecting the euro area. to this end, the eurosystem carried out a comprehensive financial crisis simulation exercise in may 2006 which confirmed its preparedness to deal with potentially systemic events that

. for central banks and supervisors, this means taking climate and nature into account in the pursuit of their monetary policy and supervisory objectives. if they failed to do so, they would be failing on their mandate. the work that we are doing individually and collectively proves that we will not allow this to happen. thank you for your attention. 1 emambakhsh, t. et al. ( 2023 ), " the road to paris : stress testing the transition towards a net - zero economy ", occasional paper series, no 328, ecb. 2 basel committee on banking supervision ( 2021 ), climate - related risk drivers and their transmission channels, april. 3 boldrini, s. et al. ( 2023 ), " living in a world of disappearing nature : physical risk and the implications for financial stability ", occasional paper series, no 333, ecb. 4 / 4 bis - central bankers'speeches