, long term rates responded much less than in previous interest rate cycles and the yield curve flattened unexpectedly. over the same period, financial markets have gone through deep structural changes. financial innovation and extensive financial engineering fuelled a “ search for yield ” through increased risk taking. the development of securitisation has spurred the demand for new types of instruments. this demand led the financial system to generate new assets even at the cost of extending credit to ever riskier sub - prime borrowers. this, for a time, helped sustain a rapid increase of real estate prices which in turn stimulated the growth of mortgages. the main causes of the crisis therefore lie in the growing “ real ” imbalances and the uncontrolled development of financial innovations. overall, these combined evolutions led to a generalized increase in leverage and financial fragility. against this background, it is quite unlikely that too accommodative monetary policies played a central role in the crisis. some analysts have pointed out to what they see as an “ asymmetric response ” by monetary authorities to asset price increases : central banks would not lean against asset price bubbles, but were prepared to clean the consequences after they burst. however, we need to ask ourselves whether the unusually rapid credit growth in the years preceding the crisis should not rather have called for complementary policy actions on the supervision side. some attempts were made in the eurosystem. in particular, the bank of spain enforced dynamic provisioning to curb domestic credit expansion. but the crisis hit globally nevertheless and it raises several challenges for authorities in charge of macroeconomic policies. ii – managing the crisis starting in august 2007, central banks were confronted with major and unprecedented tensions. increasing uncertainty led to liquidity hoarding by financial institutions. banks severely limited the maturity, the scale and the number of counterparties to whom they would lend. this liquidity freeze further deteriorated after the bankruptcy of lehman in september 2008. central banks intervened massively in order to tame the liquidity crisis and prevent its spill over to the real economy. this intervention took various forms across countries, reflecting the specificity local financial markets. in the euro area financial intermediation occurs mainly through the banking system. most of our actions, therefore, aimed at providing banks with sufficient liquidity through repo operations to ensure that the flow of credit to the economy would not be severely disrupted. we have been fortunate to enter the crisis with a very appropriate set of tools. from the outset, our operational framework was

right method to use, as it does not solve the fundamental problem, namely incorrect assessments of credit and risks and the lack of capital in the banks to cover losses. furthermore, i can see a number of risks if this proposal were adopted, although i will return to that later. i would first like to accentuate the widespread and laborious work carried out for many years, on both a national and international basis, to promote stability and prevent crises from arising, but without impairing the functioning of the markets. experience shows that a necessary condition for avoiding crises is to pursue a fiscal and monetary policy that is aimed at creating stability and that inspires confidence. the common denominator for countries that have experienced financial crises is that the problems were based on mistakes in economic policy and deficiencies in regulatory frameworks. the financial market is often merely the messenger illustrating the fundamental problems. it is important that the choice of exchange rate regime is in line with the economic policy pursued and with the capacity of the economy to adapt. countries that have experienced currency crises during the 1990s have had fixed, but adjustable, exchange rates. today, therefore, an increasing number of countries choose to have either floating exchange rates with inflation targets, or completely fixed exchange rate regimes, such as currency boards. experience also shows that it is necessary to have a general regulatory framework that is applied properly, and that contains norms and institutions, in order for both national and international financial markets to function well. countries therefore cooperate in international organisations, such as the bis, the central banks'organisation in basel, to work together on producing norms for suitable regulations and norms in various fields important to financial stability. great progress has been made in this field in recent years, both in agreeing on norms and implementing them. for instance, norms have been produced for payment systems, accounting and auditing, bankruptcy legislation, transparency in fiscal and monetary policy and measures against money laundering. when i was the nordic - baltic representative on the imf's executive board, we worked hard to establish norms for correct and detailed reporting of economic statistics. the world bank, the imf and other organisations support countries wishing to adapt their legislation to meet the norms, by assisting with expert help. several swedish experts take part in this work. it is in the interests of all nations to apply these jointly agreed norms, as this reduces the risk of financial crises. in addition, countries that do not follow the norms will find it more difficult to borrow on the international capital market,