. why did central banks not see the crisis coming? in 2006 and 2007 i said – on behalf of the governors of central banks meeting in basel – that the quantity of risk and the price of risks were underestimated in global finance. spreads were very low, risk premia were abnormally meagre and volatility was very modest. this called for a market correction and we asked market participants to prepare for that market correction. you forecast the crisis? not the extent and the depth of this global crisis. but if anyone saw warning signs and voiced them, it was the central banks. how can the central banks now help to find a way out of the crisis? with rates near to zero, can you do any more than print money? the present circumstances are extraordinary. central banks and governments must therefore resort to extraordinary measures. to prevent the collapse of the financial system, we have provided the banks with an exceptional framework of liquidity providing. but citizens can have full confidence that we will guarantee stable prices over the medium and long term. the 329 million citizens of the euro area are very clever. they would not improve their level of confidence and help restarting the economy if they had the sentiment that we were forgetting our primary medium term goal. do you think that governments will be able to quickly pay off the debts they are now accumulating? we call upon the governments to do that. we support strongly the european commission in its task of ensuring the respect of the stability and growth pact in such exceptional circumstances. many people expect either a massive reduction in the value of money or tax increases – or both? are the fears justified? we are here to preserve the value of the money of our fellow citizens. they can count on us. as regards governments ’ fiscal policies they must be designed to incorporate the exit strategies to reassure people that these policies are on a medium term sustainable path. many experts, however, are worried about deflation, i. e. a lasting fall in prices. are there grounds for such fears? we should not confuse disinflation and deflation. at the moment i am speaking, we are experiencing very low inflation and in the months to come negative inflation due to the decrease of the prices of oil, energy and commodities, before it increases again at the end of the year. this is good for the purchasing power of households and is a correction of the high prices of the past. deflation means steady decrease of all prices and negative inflation expectations. this

oversight, were a significant contributor to the crisis. the federal reserve has been working with the other member agencies of the financial stability oversight council ( fsoc ), established by the dodd - frank act, to close these regulatory gaps. on april 3 the fsoc issued a final rule and interpretive guidance implementing the criteria and process it will use to designate nonbank financial firms as systemically important. 2 once designated, these firms would be subject to consolidated supervision by the federal reserve and would be required to satisfy enhanced prudential standards established by the federal reserve under title i of dodd - frank. the fsoc ’ s rule provides detail on the framework the fsoc intends to use to assess the potential for a particular firm to threaten u. s. financial stability. the analysis would take into account the firm ’ s size, interconnectedness, leverage, provision of critical products or services, and reliance on short - term funding, as well as its existing regulatory arrangements. the fsoc ’ s issuance of this rule is an important step forward in ensuring that systemically critical nonbank financial firms will be subject to strong consolidated supervision and regulation. more work remains to be done, however. in particular, although the basic process for designation has now been laid out, further refinement of the criteria for designation will be needed ; and, for those firms that are ultimately designated, it will fall to the federal reserve to develop supervisory frameworks appropriate to each firm ’ s business model and risk profile. as the fsoc gains experience with this process, it will make adjustments to its rule and its procedures as appropriate. regulation of shadow banking i have been discussing the oversight of systemically important financial institutions in a macroprudential context. however, an important lesson learned from the financial crisis is that the growth of what has been termed “ shadow banking ” creates additional potential channels for the propagation of shocks through the financial system and the economy. shadow banking refers to the intermediation of credit through a collection of institutions, instruments, and markets that lie at least partly outside of the traditional banking system. as an illustration of shadow banking at work, consider how an automobile loan can be made and funded outside of the banking system. the loan could be originated by a finance company that pools it with other loans in a securitization vehicle. an investment bank might sell tranches of the securitization to investors. the lower - risk tranches could be purchased by an