in japan during the crisis, bank lending substituted the financial intermediation function during such phase and underpinned the rapidly deteriorating firms ’ funding. subsequently, when the functioning of the capital market was restored, bank lending started to decline. therefore, it became clear again that the existence of multiple financial intermediation channels is important for the availability of firms ’ funding and the robustness of the financial system. bis central bankers ’ speeches second, the existence of multiple financial intermediation channels alone would not be sufficient to ensure financial system stability. former federal reserve board chairman greenspan once pointed out that one reason for japan ’ s protracted crisis was that its financial intermediation was concentrated on banks, and the financial system like that in the united states, which has a variety of financial intermediation channels, would be more robust against shocks to the financial system and the real economy. however, the fact that the crisis deepened in the united states implies that such view is not necessarily correct. what is important is that each financial system participant maintains business soundness and pursues solid risk management, and, at the same time, that the regulatory and supervisory authorities and central banks recognize where the risks lie in the financial system as a whole from a macro perspective and take proper responses. namely, i believe it is critical for financial system stability to maintain not only the robustness of the financial system structure but also self discipline of financial system participants and the risk capturing capability of the authorities at a high level as a whole. c. challenges for japanese financial institutions : micro perspective i will next talk about two specific challenges for japanese financial institutions. i will touch on the challenges for the authorities in the final part of my speech. selecting business models and sustained improvement in profitability the first and the biggest challenge for japanese financial institutions is to raise their profitability in a sustained manner. looking at the recent business performance of japanese financial institutions, core profitability has been trending down due partly to a narrowing profit margin and declining lending outstanding. for that reason, an increase in profitability is an imminent challenge. in doing so, while it applies to every industry, it is essential to choose the optimal business model that utilizes an institution ’ s respective realms of expertise. as i have mentioned earlier, competition in commercial banking business, in which japanese financial institutions are mainly engaged, is expected to intensify at home and abroad. japanese financial institutions that receive domestic stable personal deposits have an advantage, including funding for overseas activities, in

##ncy. consideration of the lessons from the financial crisis and the introduction of improvements to the eu framework for supervision and crisis management has already started. in october, the european commission set up an independent high level group to develop proposals to strengthen the supervision of european financial institutions and markets and financial stability arrangements. the group shall present its report to the european commission in view of the spring european council 2009. i will assure you that the ecb governing council will examine very carefully all proposals which will be made by the high level group, as well as by the european parliament and by the industry itself. conclusion ladies and gentlemen, continued financial integration is of key importance for europe. the financial crisis that we are currently facing may have caused a freeze on this development in some markets ; all the more i urge us all to keep the momentum in this important process. the ecb remains firmly committed to fostering further financial integration. the successes of target and target2 demonstrate the importance of the work done in the field of market infrastructures. we will now continue working hard in order to address the still remaining gaps. finally, the financial crisis confirmed the importance of an appropriate public policy response, both in terms of crisis prevention and crisis management, to avoid cross - border spillovers in the single market. stronger coordination among member states and eu institutions for crisis prevention and crisis management is needed. the ecb will closely follow the debate and contribute to it where necessary. i thank you for your attention.