pre - crisis global macroeconomic environment was characterised by low interest rates, low inflation and sustained economic growth. this strengthened investors ’ risk appetite and contributed to the underestimation and under - pricing of risk. the intensified search for yield fostered the proliferation of innovative financial instruments such as structured finance products. rising leverage and excessive credit growth increased the vulnerability of the financial system. i am very grateful to kevin koerner and stephan sauer for their valuable input. this fragility set the stage for the turbulence in financial markets which started in summer 2007. with the end of the boom in the us housing market and increasing interest rates on sub - prime mortgages, delinquency rates on mortgage loans rose. the value of mortgagebacked securities dropped heavily. from the sub - prime market segment, the tensions gradually spilled over to most other asset markets, in particular the credit derivatives markets, corporate bond and equity markets, and also to the money markets, not only in the us but also in the euro area and elsewhere. with the bankruptcy of lehman brothers on 15 september 2008, the crisis sharply intensified. let me now illustrate the developments in financial markets since the beginning of the turbulence with the help of some charts. chart 1 shows the recent movements in euro area stock prices, represented by the dow jones euro stoxx index. from 15 september 2008 until mid - january 2009, this broad index declined dramatically, losing about 30 % of its value. since july 2008, the index has declined even more, by about 50 %. as you can see from the chart, the most severe stock market losses occurred in the banking sector, with a decline of about 50 % since mid - september 2008 and about 70 % since summer 2007. chart 2 illustrates the exceptionally high level of uncertainty in stock markets, here measured by implied volatility taken from stock options on the dow jones euro stoxx 50 index. in autumn 2008, implied volatility skyrocketed to new historical highs not only in the euro area but across the globe. at the heart of the crisis has been a general deterioration of confidence in the health of the banking sector and worries about a weakening economic outlook. this has led to a gradual and global repricing of credit risk. as shown in chart 3, the yield spread between corporate bonds and government bonds has widened markedly. in particular, lower - grade financial firms have been affected mainly on account of increased credit risk perceptions and a much lower general risk appetite. perhaps

, transparency in all respects is necessary in order to make informed investment decisions. for example, the ecb welcomes the initiatives to create central counterparties for credit default swaps and expects to see concrete results. third, although business cycles are a common characteristic of market economies, public authorities should shape the economic order in ways that limit the probability and extent of future crises. in this context, regulatory and supervisory bodies have to ensure that their regulations and actions do not amplify business cycles. the current review of capital requirements in the financial sector is an important device for making risk measurement and management more effective and comprehensive. guidance concerning liquidity risk management has already been published. moreover, a debate on improvements in accounting rules is ongoing. in this respect, fair - value accounting rules should be changed to reduce a tendency to magnify boom - and - bust cycles. marking - to - market practices provide timely and relevant information on the state of financial firms under normal market conditions. yet, they may also trigger negative feedback effects when markets are disrupted, as financial institutions may be required to sell assets into falling markets, exacerbating the asset price decline. furthermore, accounting rules should support banks in building buffers during good times against future losses. see reinhart and rogoff ( 2008, 2009 ) for a comprehensive overview of financial crises and their impact on real gdp. responding to the financial crisis by supporting trust in the financial system, by preventing constraints on credit supply and by addressing the shortcomings in the financial system that i have just mentioned – these are our most immediate concerns. at the same time, we must not forget that the long - term prosperity of the european union does not only depend on a sound financial system. in order to increase europe ’ s long - term growth potential, to promote the creation of jobs and to increase the resilience of the economy to shocks, the implementation of the lisbon strategy for growth and jobs remains of key importance. in particular, investments in innovation, education, qualification of the labor force, and competive markets should become the focus of policies again. 4. conclusion let me summarise the main points : we are experiencing a severe financial crisis that has started to show substantial spillover effects to the real economy in the euro area. we have seen that european policy - makers have lived up to their responsibilities and acted in a swift and concerted manner. at the same time, we have to acknowledge that we are going through a phase of