##ation of bank loans, of credit risk transfer ( crt ) instruments and of complex structured finance products resulted in the distribution of risks and the creation of risk exposures that could not be managed effectively by financial institutions and other market participants. and the international integration of financial markets and the repackaging and transfer of credit risk made possible by financial innovation partly explain how the shock to a relatively small segment of the us financial market spread globally across borders and across other markets. but this is only part of the story, because a number of other factors played a crucial role in triggering the turmoil and in propagating and amplifying its effects. let me emphasise five such contributing factors or weaknesses in the financial system from a larger list : • first, inadequate risk assessment and management, especially of funding liquidity risk, concentration risk, the risk embedded in complex structured finance products, and the risks associated with the off - balance sheet exposures of banks. • second, shortcomings and uncertainties in the valuation of structured finance products, due to their complexity, imperfect information about the underlying asset characteristics and excessive reliance on the ratings of such products by credit rating agencies. • third, distorted incentives that, inter alia, adversely affected the implementation of the “ originate and distribute ” model by banks and other market participants in the chain of origination, distribution and acquisition of credit risks ; • fourth, the emergence of new financial entities – the off - balance sheet conduits and structured investment vehicles – which were sponsored by banks and which were characterised by excessive leverage and maturity mismatches on their balance sheets, because they held illiquid structured finance products and financed them by issuing short - term asset - backed commercial paper ; • fifth, and last on my list, imperfect information about the quality and performance of underlying assets, inadequate transparency about the characteristics and risks of structured finance products and insufficient disclosure about the risk exposures of financial institutions as a result of their on - and off - balance sheet holdings. this list of other contributing factors and system weaknesses – and it is not an exhaustive list – shows that it was not the processes of financial integration and innovation per se that were responsible for the market turmoil. other specific factors such as inadequate risk management, valuation problems and uncertainties, distorted incentives, imperfect information, insufficient transparency and disclosure played a crucial role in the propagation and amplification of shocks. put differently, the rapid advances in financial innovation and integration had not been accompanied by adequate appreciation of

to be addressed are related to two processes that have affected the functioning of the financial system and its impact on the economy : first, financial integration, and second, financial innovation and development. during the first day, the focus is on the increasing financial integration both globally and in europe : its measurement, its determinants, its effects on the real economy – notably productivity growth, capital accumulation, income divergence – and its impact on the lending practices of financial institutions. the policy implications of european financial integration for supervisory structures will be addressed by the panel at the end of the first day. during the second day, we will concentrate on issues pertaining to financial development and innovation, including the role of institutions and legal frameworks, the contribution of venture capital and private equity, and the broader effects of financial innovation on economic performance. the consequences of highly developed and sophisticated financial systems for the distribution of risk will be the subject of discussion in the second panel tomorrow. ii. financial integration, financial innovation and economic performance let me now briefly raise a few issues concerning the role of financial integration and financial innovation in influencing the economy ’ s performance. i will do so from a policy - maker ’ s point of view and in the light of the ongoing market adjustment. i will suggest some areas where research can provide useful pertinent analysis. over the past decade, a growing volume of research has examined some of these issues, but there is still a lot to learn about the mechanisms through which increasing financial integration and continuous financial innovation have been affecting the efficiency and stability of our economies, as well as about their potential impact on the conduct of monetary policy and the performance of supervisory and financial stability tasks. there is little doubt in my mind – and economic research provides solid theoretical arguments and ample empirical support – that both financial integration and financial innovation have beneficial effects for the efficiency of both financial and real markets. accordingly, they have affected positively long - term economic growth and have contributed to the moderation of aggregate output volatility. the findings of some of this research are included in the “ handbook of european financial markets and institutions ”, to be released tomorrow in the context of this symposium. what about the potential impact of financial integration and innovation on the stability of the financial system and, more generally, on macroeconomic stability? conceptually, the analysis of this question is less straightforward and the answers given have been either ambiguous or nuanced. moreover, developments since the summer of 2007 and the ongoing market adjustment have highlighted the role