investment opportunities. how close an economy is to the break point, exceeding which would impair the efficient allocation of savings, could be labelled the degree of financial fragility. this definition is very broad and - in my opinion - intellectually convincing. due to the focus on the resilience of the financial system it would not classify each individual bank failure or each large swing in an asset price as proof of financial instability. to the contrary, large swings in asset prices possibly leading to some failures of monetary and financial institutions in the aftermath of a large real or financial shock could even be a sign of stability and of self - purifying powers of the system, as long as an efficient financial intermediation and financing process can be maintained. however, this definition contains little practical guidance for any institution trying to maintain or to contribute to the goal of financial stability. other, less conceptually convincing, but more directly observable definitions ( and therefore frequently used in theoretical work ) equate financial stability with situations without banking crisis and with asset price stability, including interest rate smoothness, see gaspar and smets ( 2002 ) and issing ( 2000 ). see ecb ( 1999 ). a similar definition stressing the shock resilience and the payment processing dimension of financial stability can be found in padoa - schioppa ( 2002, p. 21 ). in this context one could think of schumpeter ’ s creative destruction and the reduction of moral hazard risks. relative to some benchmark. but such definitions are only apparently more tangible, because a suitable benchmark would still have to be found. the difficulties related to the definition of financial stability reveal more than problems with semantics. the central bank ’ s role in contributing to financial stability is at stake. the definition to some degree predetermines the role subscribed to monetary policy in contributing to the goal of financial stability and anticipates the answer to the trade - off question. for example the system - based definition of financial stability intuitively and reasonably suggests that prudential supervision should play the first violin in pursuit of financial stability objectives. the reason is that comparing the toolboxes of regulators and monetary policy authorities ( in a narrow sense ), it is clear that the former have an absolute advantage in caring for system wide stability of financial institutions, as they are able to define, monitor and enforce the rules of the game. the central bank ’ s tools primarily influence the money supply

are monitored, together with a large set of other financial indicators. one aspect of our monetary analysis is the identification of low - frequency trends in money and credit growth. this medium to long - term focus is an implicit way to protect against excessive money, credit and asset price growth in our interest rate decisions. the focus of the ecb monetary analysis on low - frequency trends is also consistent with the fact that over a long time horizon, price stability and financial stability complement and reinforce each other. financial imbalances, leading to excess credit growth, high leverage, loose credit standards, booming asset prices and under - pricing of risk, create the conditions for abrupt market corrections, which also endanger the maintenance of price stability. recognising the importance of monitoring developments in money, credit, and asset prices, does not mean neglecting the difficulties associated with their interpretation, particularly in periods of rapid financial innovation. moreover, there is always a risk of reacting inappropriately to unusual developments, when these are instead in line with fundamentals. see, for example, christiano, motto and rostagno ( 2003 and 2006 ), curdia and woodford ( 2008 ), de fiore and tristani ( 2007 and 2008 ), de fiore, tristani and teles ( 2009 ), faia and monacelli ( 2007 ), faia ( 2008 ), and gertler and karadi ( 2009 ). however, most policy decisions are confronted with similar informational problems and require a difficult evaluation of the statistical evidence. while monetary and financial conditions are explicitly part of the analysis of the risks to price stability at the ecb, such policy is not a panacea, nor a certain means to ensure that financial crises never arise. there are limitations to what monetary policy alone can achieve. excessive risk and pro - cyclicality in the financial system can also result from factors other than sustained credit growth and high leverage. hence, they require policy actions that can address the underlying causes of these factors. supervisory and regulatory instruments are particularly well suited to preventing excessive risk - taking and the accumulation of financial imbalances. in this respect, the creation of the european systemic risk board ( esrb ) should contribute to foster financial stability. the esrb was proposed following the setting up of the de larosiere group in february 2009, and its establishment was agreed by the ecofin council in june 2009. the main tasks of the esrb will be to monitor the stability of eu